R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF GARY GEORGE
December 16 and 17, 1998
J.A. Geller, QC - Vice-Chair
J.F. Howard, QC - Commissioner
R.S. Paddon, QC - Commissioner
T.S. Moseley - For the Staff of the Ontario Securities Commission
Joseph Groia - For the Respondent
These proceedings were commenced by a Notice of Hearing dated September 3, 1998 toconsider:
(a) whether, pursuant to Section 127 of the Securities Act (the "Act"), it is in the publicinterest for the Commission to make an order that the exemptions provided for inSections 35, 72, 73 and 93 of the Act shall not apply to Gary George ("George") forsuch period as the Commission may direct;
(b) whether, pursuant to Section 127 of the Act, it is in the public interest for the Commission to make an order that trading in any securities by George cease for such period as the Commission may direct; and
(c) such other matters as the Commission considers appropriate.
In support of the relief requested, the staff ("Staff") of the Commission made the followingallegations:
1. The respondent Gary George is an individual resident in British Columbia.At all material times, George was a resident of Ontario and was registeredunder the Securities Act, R.S.O. 1990, c. S.5 (the "Act") as a director, tradingofficer and interim branch manager of Marleau, Lemire Securities Inc.("Marleau").
Communication of Non-Public Information
2. On May 29, 1995, George attended a meeting of members of Marleau'sinstitutional sales group. In the course of that meeting, one participantdisclosed information he had received from the chief executive officer ofSolid State Geophysical Inc. ("Solid State").
3. The information revealed in the meeting disclosed that Solid State expectedthat it would be reporting a significant reduction in earnings for the ninemonths ended May 31, 1995.
4. Following the meeting, representatives of Marleau contacted the TorontoStock Exchange (the "TSE"), on which shares of Solid State were listed.Marleau advised the TSE that it appeared that material information withrespect to Solid State, which had not previously been generally disclosed,had been disclosed in the Marleau meeting. As a result of the disclosure,trading in shares of Solid State was halted later that morning.
5. At 3:39 p.m. on May 29, 1995, Solid State announced that it expected thatit would be reporting earnings of approximately 35 to 40 cents per share forthe nine months ended May 31, 1995, compared to earnings of 65 cents pershare for the six months ended February 28, 1995. Trading in shares ofSolid State resumed the following morning.
6. At 9:40 a.m. on May 29, 1995, prior to the Solid State trading halt, Georgesold short 2300 shares of Solid State, at a price of $7.75 per share.
7. On May 30, 1995, George purchased 2300 shares of Solid State at $7.00per share to cover the previous day's short sale.
Conduct Contrary to the Act
8. At the time of the short sale, George was a person in a special relationship(as that term is defined in the Act) with Solid State. George had knowledgeof a material fact with respect to Solid State that had not been generallydisclosed.
9. George's trade in shares of Solid State on May 29, 1995 thereforeconstituted a contravention of subsection 76(1) of the Act.
10. Such additional allegations as counsel may advise and as the Commissionmay permit."
Improper Insider Trading
Subsection 76(1) of the Act provides as follows:
(1) No person or company in a special relationship with a reporting issuer shallpurchase or sell securities of the reporting issuer with the knowledge of a materialfact or material change with respect to the reporting issuer that has not beengenerally disclosed.
Subsection 96(5) of the Act defines "person or company in a special relationship with areporting issuer" to mean:
(a) a person or company that is an insider, affiliate or associate of,
(i) the reporting issuer,
(ii) a person or company that is proposing to make a take-over bid, asdefined in Part XX, for the securities of the reporting issuer, or
(iii) a person or company that is proposing to become a party to areorganization, amalgamation, merger or arrangement or similarbusiness combination with the reporting issuer or to acquire asubstantial portion of its property;
(b) a person or company that is engaging in or proposes to engage in anybusiness or professional activity with or on behalf of the reporting issuer orwith or on behalf of a person or company described in subclause (a)(ii) or(iii);
(c) a person who is a director, officer or employee of the reporting issuer or ofa person or company described in subclause (a)(ii) or (iii) or clause (b);
(d) a person or company that learned of the material fact or material change withrespect to the reporting issuer while the person or company was a person orcompany described in clause (a), (b) or (c);
(e) a person or company that learns of a material fact or material change withrespect to the issuer from any other person or company described in thissubsection, including a person or company described in this clause, andknows or ought reasonably to have known that the other person or companyis a person or company in such a relationship.
Subsection 1 (1) of the Act defines "material change" and "material fact" as follows:
"material change", where used in relation to the affairs of an issuer, means achange in the business, operations or capital of the issuer that would reasonably beexpected to have a significant effect on the market price or value of any of thesecurities of the issuer and includes a decision to implement such a change madeby the board of directors of the issuer or by senior management of the issuer whobelieve that confirmation of the decision by the board of directors is probable;
"material fact", where used in relation to securities issued or proposed to be issued,means a fact that significantly affects, or would reasonably be expected to have asignificant effect on, the market price or value of such securities;
George is 41 years of age. He graduated with an economics degree from the Universityof Alberta in 1983, took the Canadian Securities Course in April of 1983, and began hiscareer in the securities industry in the same year, when he joined McLeod Young Weir asa retail salesperson. He moved to Alfred Bunting & Company in 1988, and began at thattime to service institutional accounts. In 1991 he moved to Loewen Ondaatje McCutcheon,and in January of 1993 to Marleau, Lemire Securities Inc. ("Marleau") in Vancouver. Hemoved to Toronto in 1994. From April 21, 1994 to July 14, 1995, he was registered underthe Act as a trading officer (Executive Vice-President) and interim Branch Manager ofMarleau, which was then registered under the Act as a broker, investment dealer andfutures commission merchant. In the Fall of 1993, he became the head of institutionalsales for Marleau. In July of 1995, he moved to Deutsche Morgan Grenfell, and in Octoberof 1996 to Scotia Capital Markets, at which he is still employed as an institutionalsalesman, covering accounts in Alberta and British Columbia from that firm's Vancouveroffice. He is no longer a registrant under the Act. Until these proceedings werecommenced, he has never been the subject of disciplinary or regulatory proceeding by asecurities commission or self-regulatory organization, except for one investigation by theInvestment Dealers Association of Canada on the complaint of a client. The complaint,after investigation, was closed without further action.
The other witnesses at the hearing, including David Wright ("Wright"), Staff's witness,spoke highly of George and of his integrity.
It was the practice of Marleau to have a morning meeting at 8:00 a.m. every business day.These meetings normally lasted from 45 minutes to an hour, and were attended by thefirm's salesmen, analysts and traders. Unless called out of a meeting, the salesmen werepresent throughout the meeting, following which they remained behind to discuss salesstrategies for the day. The traders often left the meetings between 8:30 and 8:45 a.m.
The people involved in the meetings at Marleau's Montreal and Toronto offices gottogether in the boardrooms of those offices, which were connected by teleconferencefacilities. Those in Western Canada called in from their homes or offices.
At the meetings, the traders reviewed the block lists which they had for the day, and theanalysts discussed developments in the companies that they were following and theiropinions on the stocks of those companies, following which the salesmen developed theirscript for the day. After the meetings, the salesmen would go off to make their calls to theirclients.
Salesmen, traders and analysts were "highly encouraged" to be present at all morningmeetings.
Wright joined Marleau in 1991 and in 1995 was the co-director of research for Marleau,working out of Marleau's Toronto office. The other co-director was Rob McConnachie("McConnachie"), who worked out of Marleau's Vancouver office.
Wright was responsible for the "high tech" and bio-tech analysts of the firm, andMcConnachie for the other analysts, including the oil and gas analysts.
Solid State Geophysical Inc. ("Solid State") was an issuer, the shares of which traded onThe Toronto Stock Exchange (the "TSE") and which was followed by Gordon Gee ("Gee"),an oil and gas analyst at Marleau who reported to McConnachie. It was Wright's evidencethat at the morning meeting on May 29, 1995 (the "May 29 Meeting"), at which Wright waspresent, Gee spoke about Solid State. Wright was asked to state in as much detail as hewas able to recount what Gee had said. His answer was "It is not very good detail. So hewould have begun talking about Solid State and that the president had phoned him on theweekend. I believe he had said Friday night, and told him that operations had gone a bitawry, that you know, they weren't going to have the earnings that everyone was looking forfor the year, and this would change his impression of what his forecast should be, and itwasn't a matter of, you know, dropping 10 cents, or taking 10 per cent of the earnings out."Wright went on to say that "Like it was a big swing, and a big change, and it seemed to bea big surprise'' and that at that point he jumped in and said ''Has the company made apublic statement about this?'' and Gee replied ''No, he has phoned myself and anotheranalyst or two.'' Wright says that he then said ''Well, that is not proper dissemination, justto call an analyst to tell what is going on'' and ''You know, this appears to be clearlymaterial, and not public'' and ''You know, people in this room, we should not be trading onthis information, and Gordon, you should go back to the company and get them to makea public statement.''
Wright further testified that, after the meeting had concluded, he telephoned McConnachiein Vancouver and that they discussed the situation and then got Gee on the telephone athis home to further discuss the situation. Wright and McConnachie then decided thatJoanne Sinclair ("Sinclair"), Marleau's compliance officer, should be advised of theproblem. This was done. It was decided that the TSE should also be advised, and thatSinclair would do so.
It was Wright's evidence that when he then returned to his desk, he was told by hisadministrative support person that Marleau was trading in the stock of Solid State, and thatGeorge was trading the stock. Wright says that he then walked over to Andrew Knight("Knight"), a trader in Marleau's Toronto office, and asking Knight about this, and thatKnight indicated to Wright that it was George's trade.
Wright was asked by Mr. Moseley to identify who in the sales area normally attendedmorning meetings in the Spring to Summer of 1995. He responded "So the sales team ofwhich Gary [George] was head, the sales of team [sic], so he would have been there." Hethen indicated that there could be fourty people in one room in Montreal and eventually upto two hundred and twenty-five people over six offices. He identified these other salespeople by name, two of whom it transpired had left Marleau before May of 1995. One ofthose more than a year before. Wright was then asked whether he was able to saywhether or not George regularly attended morning meetings, and responded "Yes, hemade a great effort to be at the morning meetings", and "So he definitely made an effortto be there, and appreciated it."
At a subsequent point in his testimony, Wright was asked by Mr. Moseley why Wright wasshocked when he learned that George had traded in the Solid State stock, and Wrightresponded "It wasn't something I expected from Gary. It just...it didn't seem in character.I highly respect Gary. So it shocked me. It just...I mean, he was in the morning meeting,so he heard all this discussion. I just didn't know why he had done it."
Wright says that, after learning of the trade by George, he advised Sinclair that there wastrading going on and that "We had better make sure something is done here."
On August 23, 1995, Sinclair prepared a memorandum to file, which was filed as an exhibitin these proceedings. It read as follows:
"On May 29, 1995 at approximately 10:00 a.m. David Wright called me and advisedme that during the morning meeting Gordon Gee had told the participantsconfidential information. Gordon Gee had spoken with a senior representative ofSolid State on Friday evening and had been advised that an event had occurredthat would affect their quarterly numbers (I think a mine that they were counting onwas no good). Gordon told the meeting this information as if it were public. It wasdetermined during the meeting that it was not public. Gordon Gee advised us thathe was not the only analyst that this information was given to.
After my discussion with David, I immediately called the TSE Market SurveillanceDepartment and spoke with Neil Winchester. I mentioned to Neil that we wereconcerned with the events that had occurred but that Solid State was a good clientand we would appreciate it if he could keep this a confidential as possible. Afterdiscussing the matter with Neil, he agreed that he would contact the Company andadvise them that the information was on the street and that a press release shouldbe put out. As I understand it, the Company was not in a position to put out thepress release at that time and so the stock was temporarily halted. Neil alsoadvised me that I should immediately stop all unsolicited trading of Solid Statewithin the firm. Because there was not time for formalities, such as a memorandum,I called Ron Campbell, our head trader and advised him of this restriction. Thiswould have been around 11:00 a.m."
The memorandum did not mention George's short sale of Solid State shares the morningof May 29, 1995, nor did it contain any mention of Wright saying at the May 29 Meetingthat there should be no trading by Marleau personnel of Solid State shares. Thememorandum was also strangely silent as to any action taken by Marleau, apart fromSinclair's call to Ron Campbell, to ensure that there was no improper trading by Marleaupersonnel of Solid State shares. In addition to George's short sale, there were severaltrades of Solid State shares out of Marleau's Vancouver office at the commencement oftrading on May 29, 1995. We heard no evidence as to whether these were solicited orunsolicited trades.
On August 31, 1995, McConnachie, at Sinclair's request, prepared a memorandum toSinclair which was also filed as an exhibit in these proceedings. It read as follows:
"As requested, the following is my recollection of the dissemination of materialinformation of Solid State Geophysical (SSS).
1. On the May 29, 1995, during the 8:00 a.m. institutional sales conference call,Gordon Gee began by saying Solid State was going to have a material loss(versus a forecasted profit) in the Quarter due to problems in Venezuela. Hethen said he found this out because Mitch Peters, SSS's CEO, had calledhim after the market closed on Friday to tell him this information.
2. At this time, David Wright, and/or myself asked Gordon if this was publicinformation, since it was clearly material. He said Mitch Peters told him hewas going to call some other analysts as well. We then said, he cannot justphone some analysts, he must do a press release, so that everyone hasaccess to the same information at the same time. In summary, David and Ibelieve it was clearly established that the information had not been disclosedpublicly, and should not have been disclosed.
3. After the call, David and I phoned Gordon and explained the consequences.I told Gordon, that as an analyst, you often become a temporary insider, aswas the case here. We then told him, that, as an insider, he was responsiblefor spreading insider information, not Mitch Peters. To our surprise, Gordonstill did not think he was in the wrong, and added, "I guess I can see yourpoint." I would like to add that Gordon Gee has a CFA, and the rules ofdisclosure on inside information as a temporary insider are very clear.
4. After this we called yourself (Joanne Sinclair) to ask for advice on how toproceed with damage control.
5. The next morning, Tuesday, May 30, Gordon published a morning note onSSS detailing the information which was discussed the day before.
I hope the above is sufficient to your needs. Please contact me at yourconvenience if you require any further information."
The memorandum contained no reference either to Wright having said at the meeting thatno-one at Marleau should trade in Solid State shares until the information was publiclydisseminated or to George's short sale of Solid State shares. The "morning note" referredto in paragraph 5 of this memorandum was not produced, so we have no way of knowingits contents.
George Short Sale and Purchase
At 9:40 a.m. on May 29, 1995, a short sale by George of 2,300 shares of Solid State at $7-3/4 per share was entered by Marleau. At 9:24 a.m. on May 30, 1995, an order for thepurchase by George of 2,300 shares of Solid State at $7.00 per share was entered byMarleau.
McConnachie is currently employed as an associate director with Scotia Capital Markets,working in that firm's Vancouver office, where George also works.
He testified that he participated in the May 29 Meeting through a conference call, that SolidState was discussed during the meeting by Gee, that Gee mentioned that the quarterlyoutlook was looking more negative, and that "I think he said he had spoken withmanagement. I believe he said he spoke with the CEO of the company, Mitch Peters, andthat due to some problems in Venezuela, that the quarter was going to ... you know,looking to be weaker than he had previously anticipated", "he" being Gee.
McConnachie said that "I was a little concerned that this could be ... like, I wasn't certainthat it was publicly disseminated, and you know, I didn't know at that time the severity ofthe problems, but it did raise some concern with me, and so I think either myself or Davidasked him then, or else after the call, you know, how serious is it? Does anyone elseknow, et cetera, the typical things to establish whether it is either (a) material and/or non-public." McConnachie said that he was not certain as to whether these questions wereasked at or after the meeting.
McConnachie testified that he did not remember Wright stating during the meeting that theinformation was material undisclosed information, and that nobody should act on it. Whilethe memorandum refers to information obtained from the CEO of Solid State, there is noreference to Wright having said at the meeting that no one at Marleau should trade in SolidState.
McConnachie stated that, after the completion of the May 29 Meeting, Wright and hetelephoned Gee to get more information, to find out if the information was material and toestablish whether it was public information. (McConnachie, from his evidence, seems tobe under the misapprehension that, if the information had been disclosed via an analysts'conference call, it could be considered to have been publicly disseminated.) McConnachiesaid that he then discussed the matter further with Wright and they decided to contactSinclair to let her know what had happened and so that she could decide if this was anissue, and that they then did so.
Ms. Berman took McConnachie through his August 31, 1995 memorandum. He said thathe probably used notes to help him write the memorandum, since he would not haveremembered what date the incident took place and that he probably would have used theBloomberg News Service to find out what day the stock was halted and also to find outwhat Solid State's third quarter profit turned out to be. He said that he could not recallwhether the confirmation by Gee of the facts leading to the conclusion that the informationhad not been publicly disclosed happened during the May 29 Meeting or as in thesubsequent telephone call.
In cross-examination by Mr. Moseley, McConnachie acknowledged that his recollection ofthe May 29 Meeting as recorded in his August 31, 1995 memorandum was much betterthan his recollection of the meeting at the time of his giving evidence, that when he wrotethe memorandum he knew that it was going to the head of compliance at Marleau and wasimportant, that he had made his best efforts to record his recollection of the May 29Meeting as best he could, to be truthful and to put down all the important facts that hecould think of. He reiterated that he was not now certain that by the end of the May 29Meeting he had concluded in his own mind that the information had not been publiclydisseminated. However, he also reiterated that when he wrote the memorandum what hesaid was his best recollection of what had occurred. He also confirmed that, by the endof the May 29 Meeting, he had concluded that the information likely was material, but thathe could not now recall whether he was certain at the end of the meeting, or only aftertalking further with Gee, or even until after he had talked with Sinclair, that the informationwas clearly material. He just could not remember at the time of giving his evidence."...what I am saying is I now, like, after the fact, I was somewhat certain that it was materialand non-public, but I am not sure whether we drew that conclusion. I know I wrote "at thistime" but I don't remember whether it was then or after speaking with Gordon on thephone."
Jamie Holden ("Holden") is a block trader for Credit Suisse First Boston. In 1995, he wasa senior vice-president and institutional trader at Marleau's Toronto office.
Holden testified that he attended the May 29 Meeting, being among those present for it atMarleau's Toronto office, and recalls Gee speaking at the meeting about Solid State. Hestated that Gee said that his perception of Solid State was that its stock was going lower.According to Holden, Gee "generally talked about the stock, and if I remember correctly,that they may have had a problem, and the stock may be under some pressure."
Holden said that he did not recall Wright saying that he considered Gee's information tobe material non-public information and that nobody should act on it and that "I would thinkI would recall, yes, due to the fact that there would have been no trading on that stock afterthat event, and if that was said, the traders would have been advised not to accept orderson that stock."
Holden said that he recalled George's short sale but did not recall anything being amissabout it, and that, although, when first asked by George's lawyers about the May 29Meeting he may have told them that he did not recall it, he subsequently "remembered itbased on the fact that I remembered Gary selling the Solid State, and that is how Iremembered the meeting."
Holden said that he did not have any recollection as to whether Gee had told the meetingwhere he had heard the information, and that he might or might not have remembered itif Gee had said that he got the information from the President of Solid State.
Knight is an institutional equity trader with Deacon Capital. In 1995, he worked for Marleauas an institutional equity trader.
Knight believes that he executed George's short sale of 2,300 shares of Solid State.Knight is "sure that he would have checked with Ron to make sure ... Ron Campbell, inMontreal, to make sure he wasn't working any client orders on [Solid State], and then Iwould executed [sic] it." According to Knight, he did not have any concern before heexecuted the trade.
Knight testified that he "believes [he] would have attended" the May 29 Meeting. "I wouldnot miss the morning meetings, so I am sure I was there." He does not recall Geediscussing Solid State. Nor does he recall Wright raising a concern about the disclosureof information concerning Solid State. Knight stated that if Wright had said that he hadsuch concerns and said that no-one should be trading, he would not have executed thetrade.
Knight says that Wright did not ask Knight to identify who had made the short sale.
Knight does not know whether he executed George's purchase of 2,300 Solid State sharesthe next day.
Ronald George Campbell ("Campbell") is the head of trading at Groome Capital. From theFall of 1990 until the end of September in 1997, he was the head of trading at Marleau.He has worked in the securities industry for 48 years.
Campbell testified that he did not remain throughout morning meetings if they went on fortoo long. "As we progressed west, I lost my interest in the conversation. So probably byno later than a quarter to nine, I would be out of the meeting." He said that he never leftbefore 8:30 a.m.
Campbell said that he does not know whether he attended the May 29 Meeting. "I assumeI was there. You can tell me if I was there, I guess, from your records, but I could not tellyou what particular meeting I was at." "So to ask me about a specific meeting, I cannot dothat."
Campbell testified that he did not recall being at a meeting where Gee discussed SolidState. Nor did he recall Wright raising concerns about material, non-public information.However, he said that he would recall it if someone had raised concerns in a morningmeeting about the extent of disclosure relating to a company, and that he would haveheard about it if a concern had been raised at a sales meeting after he had left aboutinformation being non-public.
Campbell said that he does not recall Sinclair calling him and advising him to stop allunsolicited trading in Solid State, and that he thinks "unsolicited" was a mistake and shouldhave been "solicited." He then went on to talk about what he would have done if he hadgotten such a call.
Patricia Keays ("Keays") is currently employed as a trader with Thompson Kernahan. InMay of 1995, she was employed by Marleau as a trader in its Vancouver office.
Keays testified that she was connected by telephone at home to the May 29 Meeting, butthat she does not recall what was discussed at the meeting.
She said that she put through several trades of shares of Solid State on May 29, 1995 onbehalf of clients of Marleau, and had no concern with respect to those trades, and that hadshe heard concerns being expressed during the May 29 Meeting about the disclosure ofinformation concerning Solid State, she would not have executed the trades and wouldhave had a concern. These trades were effected at the 9:30 a.m. (Toronto time) opening.
Keays said that she did not always remain on morning meeting calls until the conferencecall was finished. [In fact the telephone records indicate that she left the May 29 Meetingcall at 8:24 a.m. (Toronto Time). According to the evidence, this was nine minutes beforeGee left the call.] She said that had a concern been expressed about Solid State after shehad left the call, she would have heard about it.
George testified that, when he was with Marleau, he was often "over the Chinese wall"because the nature of his work often made him privy to insider information and, as a result,he could rarely personally trade in securities of a Marleau client because he was "over thewall" or because he could not trade while there was a client's order ahead of him.
He said that, if in May of 1995 someone had told him that the President of Solid State wasasking Marleau to hold back its research report pending Solid State investigating apotential problem in their Venezuela division which could have an impact on theCompany's financial statements, he would have considered that information to be sufficientto put him "over the wall."
He further said that he was not aware on May 29 and 30, 1995 of the informationcontained in Mitch Peters' memorandum of May 9, 1995, and that if he had been he wouldnot have traded in Solid State stock.
George was unable to say why he made the short sale of Solid State shares. His evidencewas that he does not even remember placing the order. He said that the fact that it wasa short sale means that his interpretation was that the stock would be going down. "I wasbearish in that month, in general, and I was obviously bearish on the outlook for SolidState." He stated that his memory is no clearer as to why he bought back the position onMay 30, 1995. George said that he did not do any long or bullish trading in May of 1995,and the record of his account which was filed confirms this.
George stated that he was unable to say with certainty that he was at the May 29 Meeting,but that he believes that he was. Nor was he able to say whether, if he attended themeeting, he remained throughout.
His evidence is that he does not remember Gee making a presentation to the May 29Meeting about Solid State. George's last recollection of Solid State, because he leftMarleau in the next couple of months, was that there was a concern about its Venezuelanoperations, although he does not recall in what meeting or what context he heard aboutthis, but that there was a concern by Gee about Venezuela. He does not recall Gee tellinghim about the source or nature of the concern.
George testified that if in fact what Wright says did happen at the meeting did happen andGeorge had heard it, he would not have traded in Solid State, because he would havebeen "over the wall."
George also testified that neither Sinclair nor anyone else at Marleau spoke to him on May29 or 30, 1995 about his trades in Solid State shares, and that he was not aware on May29 or 30 that trading in the shares of Solid State had been halted on May 29.
Additional Documentary Evidence
A number of additional documents were filed as exhibits. These included the following:
(1) A memorandum from Mitch Peters (the President of Solid State) to the Boardof Directors of Solid State dated May 9, 1995, which read as follows:
"It has been brought to my attention that our gross revenues in Quarter 2may have been over-stated by approximately $1.9 million, which could havea material effect on the net earnings of the Company for the period reported.The entry occurred during the month of January on our Venezuelan booksin accounts receivable.
I have instructed Wayne Howe, CFO and Duane Peters, Treasurer, to travelto Caracas immediately to quantify this potential error. Having reviewed theoriginal bid figures, contract, operational statistics, and financial statementswith our accounting and international operations staff, my opinion is that wehave a problem which may be substantially less significant than reported,due to many discrepancies noted between the reported problem and the in-house data. Until Wayne has established all the facts, quantified the error,and resolved how this error occurred, I cannot ascertain whether this will orwill not have a material effect on our financial statements.
Upon receiving Wayne's report, I will take the appropriate action to ensurethis does not reoccur, and will also inform the Board whether or not amaterial change has occurred which will require action to comply with theregulatory authorities."
(2) A memorandum to file from Sheila David of the enforcement staff of the TSEdated July 4, 1996, which read as follows:
"On this date, the writer spoke to Wayne Howe, Executive VP and CFO ofSolid State, regarding the events leading up to the announcement ofpreliminary third quarter results by Solid State on 29/May/95. He providedthe following information:
- he spoke to Neil Winchester regarding this matter; he was in NovaScotia at the time; Market Surveillance told him that word was on thestreet, but did not advise him where the information had come from
- Solid State would have dealt with a number of member firms; theanalysts get a fair amount of information about the company andtherefore become insiders as part of that process; he was notinvolved in any dealings with analysts at that time, because he wasout of the country in Venezuela (from which he had travelled to NovaScotia on personal business)
- he was in Venezuela to take a look at the books and records of thecompany's operations in Venezuela and was in discussion with theCEO with regard to putting the figures together and determining themateriality and whether they would be required to make a pressrelease
- the process of identifying the numbers would have been going on forabout two or three weeks; he flew to Venezuela in approximately thefirst week of May and commenced an evaluation of the numbers overthe following two weeks
- this process was in-house at the time as they were still trying todetermine if there was a problem; after the second quarter resultswere released on 12/Apr/95, the company became concerned aboutinformation it received in late April or early May about a potentialproblem in Venezuela
- just prior to being contacted by the TSE, he and the CEO werediscussing the numbers and were coming to the conclusion thatadditional work had to be done; it was felt that the matter wasprobably significant and that a press release would have to be made,but they weren't at the stage of developing the press release
- the TSE wanted the press release put out immediately, but he wasnot in a position to do so, because the CEO was overseas and he hadto be contacted
- the press release was probably issued 24 or 48 hours before it wouldhave gone out
- it would not have been common knowledge within Solid State thatthere was a potential problem; Howe, the CEO, the people involvedin Venezuela and a few others would have known the details; he tookone other person from his department to Venezuela with him
- he is not familiar with Offshore Systems International
- Mitch Peters would be the one to talk to regarding contact withanalysts
- Peters, Howe and Shari Pusch, the Secretary, are generally the onesinvolved in talking to analysts; in this case, Pusch would not havebeen aware of the specifics of the situation and, in general, she wouldonly speak to analysts in broad general terms
Mitch Peters of Solid State phoned at approximately 2:45. He provided the following information:
- he spoke to Gordon Gee of Marleau Lemire and Greg MacLeish (ph)of Octagon Capital on 25/May/95; both are analysts; he spoke to thembecause he knew they were going to be putting out new researchreports; he asked them to hold back the reports, pending Solid Stateinvestigating a potential problem in their Venezuela division; he alsotold them that the potential problem could have an impact on thecompany's financial statements; he doesn't think he went into anyfurther detail; this information would have made their reports wrong
- on 25/May/95 he also spoke to Paul Moase, the President and CEOof Marleau, which was acting as Solid State's financial advisor
- Hubert Marleau, who was a director of Solid State at the time, wouldhave had all the information as well; Peters believes that he sent adetailed memo to the Board sometime prior to 25/May/95
- after the news release went out he contacted all four analysts thecompany regularly deals with (including Gee and MacLeish) and eightof the company's largest shareholders
- the Octagon report was not issued until Jul/95
- he will check the company records to confirm that a detailed memowas sent to the Board and will call me back with the details of whatwas contained in the memo
On 30/Jul/96 the writer spoke with Shari Pusch, the Corporate Secretary ofSolid State. On behalf of Mitch Peters, she confirmed that Peters sent amemo to the board on 9/May/95 regarding the potential Venezuela problem.A subsequent memo was sent to the board on 29/May/95 reporting that SolidState had made a press release concerning the matter, which release wasattached to the memo. Shari Pusch faxed copies of the memos to the writeron 30/Jul/96."
(3) The TSE's blotter for trading in shares of Solid State on May 29, 1995, whichshows that trading in shares of Solid State was halted at 11:38 a.m. on May29, 1995.
(4) Media Release by Solid State dated May 29, 1995, which read as follows:
"CALGARY, May 29/CNW/ - Solid State Geophysical Inc. (TSE:SSS) todayannounced that although the third quarter results have not been finalized, itis expected that the net earnings per share for the nine months ended May31, 1995 will be reduced by $0.25 - $0.30. The net earnings per share forthe six months ended February 28, 1995 were $0.65.
Mitch Peters, President and Chief Executive Officer commented that thereasons for this third quarter downturn can be attributed to several factorsincluding: contractual issues on foreign activities in Venezuela resulting inproject delays and cost over-runs, and domestic activities being severelyhampered by weather.
Currently, the two crews operating in Venezuela are being moved to newprojects in Ecuador and the United States; with the Yemen crew awaitingresults of foreign tenders.
Management's view is these results will not affect the Company's expansionin the U.S. market and other foreign markets.
Solid State Geophysical Inc. is recognized as a leader in the utilization ofnew seismic technology, and continues to expand its international presence."
(5) George's account statements for his personal trades for the months of Maythrough December of 1994 and January through June of 1995. Thesedisclose that George made only two short sales during the period, one of the2,300 shares of Solid State and one, made about two weeks earlier, ofshares of another company. In addition, George purchased one put duringthe period. They also disclose that the short sale was the only transactionin shares of Solid State made by George in the period.
(6) Stock price information for Solid State for the months of May and June of1995. This shows that , commencing June 2, 1995, the trading prices forshares of Solid State began to drop, and continued to do so for several days.On May 30, 1995, the board high price was $7.75, and the board low pricewas $7.00. On June 2, 1995 the high and low were $6.875 and $6.00.During the month of June, 1995, the board high price on any day did notreach $7.00.
(7) Bloomberg report of July 25, 1995, giving Solid State's results for the thirdquarter of 1995, showing an unaudited loss for the three months ended
May 31 of $0.48 per share as compared to an unaudited profit of $0.18 per share for the corresponding period of the previous year, and an unauditedprofit of $0.17 per share for the nine months, as compared to an unauditedprofit of $0.64 per share for the corresponding period of the prior year.
It should be noted that the authors of these documents were not called as witnesses.
Burden of Proof
George is a registrant in other Canadian jurisdictions. Any adverse findings which we makein these proceedings might well have an effect on the continuation of George's registrationin those jurisdictions and, thus, on his ability to continue to earn a livelihood in thesecurities industry.
The burden of proof applicable where registration is at risk was discussed by theCommission in In the Matter of Frederick Elliot Rosen (1991), 14 OSCB 1091 at page1093, as follows:
The burden of proof which we must apply in a matter such as this is clearly not thecriminal standard of proof beyond a reasonable doubt, but rather the civil standardof proof upon the balance of probabilities. It is, nonetheless, one of the higheststandards to be found outside the criminal courts. As was succinctly stated byReid J. in the Divisional Court decision in Re Coates et al. and Registrar of MotorVehicle Dealers and Salesmen (1988), 65 O.R. (2d) 526, at p. 536:
"This message is clear and has been consistently adopted by this court.Nothing short of clear and convincing proof based upon cogent evidence will
justify an administrative tribunal in revoking a licence to practice medicineor to gain a livelihood in business."
Reid J. went on to note that "the concept that the standard of proof rises with thegravity of the allegation and seriousness of the consequences" had been recentlyreaffirmed by the Supreme Court of Canada in its decision in R. v. Oakes, 1 S.C.R. 103, 26 D.L.R. (4th) 200, 24 C.C.C. (3d) 321. As he also noted, at p. 534:
"In revoking a registration the tribunal is interfering with a right to make aliving that has been equated to a property right: see Evans, Janisch, Mullanand Risk, Administrative Law, 2nd ed. (Toronto, Emond-MontgomeryPublications, 1984), at p. 80. While the grant or refusal of a licence may beregulated as a matter of privilege, rather than right, the revocation of anexisting licence has always been regarded as an interference with a right, nota privilege."
Earlier, in Re Bernstein and College of Physicians and Surgeons of Ontario (1977),15 O.R. (2d) 447, at pp. 485-6, Garrett J. in the Divisional Court stated theapplicable standard somewhat more fulsomely, as follows:
"I hold that the degree of proof required in disciplinary matters of this kind isthat the proof must be clear and convincing and based upon cogentevidence which is accepted by the tribunal. I agree with Mr. JusticeSchroeder that the burden of proof is to establish the guilt of the doctorcharged by a fair and reasonable preponderance of credible testimony, thetribunal of fact being entitled to act upon the balance of probabilities. I think,however, that the seriousness of the charge is to be considered by thetribunal in its approach to the care it must take in deciding a case whichmight in fact amount to a sentence of professional death against a doctor."
In the same decision, at pp. 470-1, O'Leary J. said much the same thing, though ina slightly different way:
"In my view discipline committees whose powers are such that theirdecisions can destroy a man's or woman's professional life are entitled tomore guidance from the Courts than the simple expression that "they areentitled to act on the balance of probabilities"...
The important thing to remember is that in civil cases there is no preciseformula as to the standard of proof required to establish a fact.
In all cases, before reaching a conclusion of fact, the tribunal must bereasonably satisfied that the fact occurred, and whether the tribunal is sosatisfied will depend on the totality of the circumstances including the natureand consequences of the fact or facts to be proved, the seriousness of anallegation made, and the gravity of the consequences that will flow from aparticular finding.
The grave charge against Dr. Bernstein could not be established to thereasonable satisfaction of the Committee by fragile or suspect testimony.The evidence to establish the charge had to be of such quality and quantityas to lead the Committee acting with care and caution to the fair andreasonable conclusion that he was guilty of the charge."
This Commission has long recognized that it must apply such a high standard ofproof in disciplinary matters before it, especially those that arise with respect to aregistrant under section 26. As Vice-Chairman Salter recently reiterated in ReGregory McGroarty, Gordon Cooper, Robert LePage, Eugene McBurney, GeraldBaxter and Lewis Taylor (1990), 13 O.S.C.B. 3887, at pp. 3935-6:
"While the point was not discussed by counsel, we think it appropriate tonote that the standard of proof in Commission proceedings will vary with theirsubject matter. In some cases a simple preponderance of probability willsuffice. In disciplinary proceedings against registrants the governingstandard of proof is that proclaimed by the Divisional Court in Re Bernsteinand College of Physicians and Surgeons of Ontario (1977), 15 O.R. (2d) 447and further discussed in Re Coates et al. and Registrar of Motor VehicleDealers and Salesmen (1988), 65 O.R. (2d) 526. In the latter decision theCourt, after reviewing and confirming Bernstein, referred with approval to thedecision of the Supreme Court of Canada in R. v. Oakes  1 S.C.R. 103for the principle that the standard of proof rises with the gravity of theallegation and the seriousness of the consequences to the respondent.
Although George's registration is not directly at risk in these proceedings, as we have saidhis registration in other jurisdictions may be indirectly at risk. Mr. Moseley acknowledgedthat he was required in these proceedings, to meet the Rosen burden of proof, and weagree.
Analysis of Evidence
Morning meetings were a daily occurrence at Marleau, and we are not surprised that mostof the participants in the May 29 Meeting who gave evidence were not able to remembermuch, if anything, of what was said about Solid State at that one particular meeting, whenasked about it some three and one-half years later, and not having had any reason toreflect on what happened at the meeting until recently.
It is unfortunate, if perhaps understandable, that it took such a length of time to bring thismatter to a hearing. Perhaps, if the hearing had been at an earlier date, the recollectionsof what had taken place at the hearing might have been clearer.
We do have McConnachie's memorandum of August 31, 1995, written just over threemonths after the May 29 Meeting, and made while the May 29 Meeting was still relativelyfresh in his mind. In the main, the memorandum supports Wright's evidence as to whatwas said with respect to Solid State at the May 29 Meeting, although it does not confirmWright's assertion that he told the meeting that no-one should trade in Solid State sharesuntil there was public dissemination of the information. In our view, whether or not Wrightdid make this particular statement is not of great significance. However, in his testimonyMcConnachie did raise questions as to the accuracy, in certain respects, of what he hadsaid in his memorandum.
After a careful review of the testimony, we are satisfied that, at the May 29 Meeting, Geetold those participating at the time that:
(a) he had been told by the President of Solid State that Solid State was goingto have a material loss (as opposed to a forecasted profit) in the then currentquarter; and
(b) the President of Solid State told Gee that he was going to telephone someother analysts with this information.
Whether or not Wright said that the information was clearly material or that no-one shouldtrade on this information, Gee's information was, in our view, clearly sufficient, if Georgewas present and heard it, to alert someone with his experience and background, and in hissenior position, to the fact that he should not trade in Solid State shares until he hadsatisfied himself either that the information was not material (whether or not it technicallyconstituted a material fact or material change) or that it had been publicly disseminated.Indeed, in his evidence, George acknowledged that this was the case.
Mr. Groia acknowledged that the information given by Gee at the May 29 Meeting wasmaterial information. We also find it to have been information as to both a material changeand a material fact. In our view, it was, on the evidence, information as to a change in thebusiness and operations of Solid State that would reasonably be expected to have asignificant effect on the market price or value of securities of Solid State and informationthat significantly effects, or would reasonably be expected to have a significant effect on,the market price or value of securities of Solid State.
We also find, on the evidence, that the information which was tipped by Gee at the May29 Meeting had not been generally disclosed at the time of George's short sale of SolidState shares.
Although neither Mitch Peters, the President of Solid State, nor Gee was a respondent inthese proceedings, and neither gave oral evidence, we feel obliged to say that, if theevidence presented to us about their statements is to be believed, neither seems to haveunderstood at all his obligations under subsection 76(2) of the Act to refrain from tipping.
Subsection 76(2) provides as follows:
(2) No reporting issuer and no person or company in a special relationship with areporting issuer shall inform, other than in the necessary course of business,another person or company of a material fact or material change with respect to thereporting issuer before the material fact or material change has been generallydisclosed.
Peters seems to have considered it appropriate to give a couple of analysts who followedthe stock of Solid State material information which had not been, and was not concurrentlybeing, publicly disclosed. Gee seems to have considered it appropriate to pass on thisinformation.
The Report of the Committee on Corporate Disclosure of The Toronto Stock Exchange (theAllen Committee), to which we were referred by Mr. Groia, makes it clear that conductof this sort may not be uncommon. We would like to make it absolutely clear that suchconduct is both illegal and improper, and that if, in proceedings commenced against anofficer of an issuer or an analyst, such conduct was proved, we would regard it mostseriously. As was said by the Commission in In the Matter of Larry Woods (1995) 18O.S.C.B. 4625 at page 4627.
The prohibition on "insider trading", i.e. trading in securities of a reporting issuer withthe knowledge of a material fact or material change with respect to the reportingissuer which has not generally been disclosed, is a significant component of theschemes of investor protection, and of the fostering of fair and efficient capitalmarkets and confidence in them, that are the cornerstones of the Act. It would begrossly unfair to permit a person who obtains undisclosed material information withrespect to a reporting issuer because of his relationship with the issuer to trade withthe informational advantage this gives him or her. To quote the striking analogyused by Farley J.:
"It is not just a question of the house in a casino situation moving the oddsin a card game or the dealer counting cards, it is akin to the dealer beingable to play with marked cards."
As Farley J. went on to say:
"when one actually trades with the benefit of insider information, then theseller is not an innocent and lucky winner. Rather the insider trader is arapacious thief."
As well, such activity, if countenanced, would detract from the credibility ofour capital markets and lead to the undermining of investor confidence inthose markets. In addition, the prohibition encourages timely disclosure ofmaterial changes, enabling investors to make better informed investmentdecisions. Accordingly, an intentional violation of the prohibition is, and mustbe regarded by the Commission as being, a very serious matter.
In our view, these remarks are equally applicable to tipping.
It would appear that some corporate officers see the maintenance of good relations withanalysts as being more important than ensuring equality of material information amongshareholders. The fact that it was thought that Gee was about to come out with a reportas to Solid State which would overvalue its shares would in no way justified Peters givingthe information to Gee rather than publicly disseminating it. If the information was materialenough to cause Gee to change his projections, it should have been publicly disseminated.In general, we view one-on-one discussions between an officer of a reporting issuer andan analyst as being fraught with difficulties.
As regards an analyst passing on to others in his firm material information which has notbeen publicly disclosed, it, unfortunately, may be seen by some analysts as being in the"ordinary" course of business, but in our view it is not in the "necessary" course ofbusiness. It is hard for us to see how it is necessary to pass on information which, as amatter of law, the recipients are prohibited from making use of.
Solid State, having had, at all material times, its shares listed on the TSE, was a reportingissuer within the definition of that term contained in subsection 1(1) of the Act.
Mitch Peters, as the President of Solid State, was a "person or company in a specialrelationship with a reporting issuer", as that term is defined In subsection 76(5) of the Act.
Gee, having learned of the information from Mitch Peters, who he knew to be the Presidentof Solid State, was also a "person or company in a special relationship with a reportingissuer."
If George was at the May 29 Meeting when the information with respect to Solid State wasdisclosed by Gee, George would have heard information which made him as well a "personor company in a special relationship with a reporting issuer."
In that case, George's short sale of shares of Solid State would constitute a violation ofsubsection 76(1) of the Act.
So the question comes down to whether George was at the May 29 Meeting at all or, if hewas there at some time, whether he was there when Gee disclosed the information whichhe had learned from Mitch Peters. If he was, then, whether or not Wright said that theinformation was material or that no-one should trade in shares of Solid State until therewas public dissemination of the information, George had the information available to himto enable him to know that his short sale of Solid State shares would violate subsection76(1).
On the one hand, George, although he acknowledges that he probably was at the May 29Meeting (although he may have been out of the meeting at times), denies having heardGee's information about Solid State. We also have difficulty In understanding whysomeone In George's position, and being the sort of honourable person which all of thewitnesses, including Wright, said him to be, would have knowingly breached the Act for therather paltry profit which he made on the short sale and purchase of Solid State shares.
On the other hand, we have Wright's testimony that George was present and heard Gee'sinformation. As well, the coincidence, if coincidence it be, of George engaging in atransaction in Solid State shares for the first time in a lengthy period, and that transactiona short sale, within an hour or so after information as to a material change and material factwith respect to Solid State was disclosed at the May 29 Meeting strikes us as beingpassing strange. In addition, as was pointed out by Commissioner Howard at the hearing,we have some difficulty in believing that the fact that trading in the shares of Solid Statehad been halted on the TSE on May 29, 1995 pending the dissemination of informationwould not have been a subject matter of discussion at Marleau on that and the followingdate, and at the morning meeting on May 30, 1995, yet George's evidence is that he didnot know of the halt when he made his purchase of Solid State shares on May 30, 1995.
Wright's evidence as to George's presence at the May 29 Meeting is not unequivocal.Although at one point in his evidence he said that George was "in the morning meeting",at an earlier point his evidence was that George "would have been there" because heregularly attended morning meetings.
Staff has not, in our view, established, in accordance with the Rosen burden of proof,George's presence at the May 29 Meeting at the time when Gee made his disclosures withrespect to Solid State. As we have said, there are reasons to question why George madea short sale of Solid State shares just when he did, and his statement that he was notaware of the May 29, 1995 trade halt, but these questions do not, in our view, enable usto conclude that George's short sale contravened subsection 76(1) of the Act or that hetraded with knowledge of material information which had not been generally disclosed.
There is one other matter which we wish to comment on, and that is the apparentdisinterest at Marleau in following up to see whether any trading had taken place whichwas or might be improper, given Sinclair's acceptance of Wright's and McConnachie's viewthat there had been improper communication of material information which had not beenpublicly disclosed.
It was George's evidence that no-one at Marleau had ever discussed with him his shortsale. Apart from Wright, none of the other witnesses had even heard of George's sale orpurchase until these proceedings were commenced. As we have said, there were othersales of Solid State shares by Marleau's Vancouver office at the opening of trading on may29, 1995. In our experience, a properly operating compliance department would, in thesecircumstances, have looked into all trading by Marleau on May 29, 1995 prior to the halt,whether it was pro trading or trading for clients' accounts, and if there was any question asto the propriety of the trades, made sure they were reversed. What, if anything, was doneby Marleau's compliance department in this connection was not shown by the evidencebefore us, but, from that evidence, it seems doubtful to us that much, if anything, wasdone.
"J. A. Geller" "J. F. Howard" "R. Stephen Paddon"