R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
ROBERT ARTHUR FRIESEN
March 22 and 23, 1999
J.A. Geller, Q.C. - Vice-Chair
H.I. Wetston, Q.C. - Vice-Chair
S.N. Adams, Q.C. - Commissioner
L.E. Ritchie - For R. A. Friesen
Karen Manarin - For the Staff of the OntarioSecurities Commission
In its decision dated January 19, 1989, the Commission concluded that Qualico SecuritiesLimited ("Qualico") engaged in continuing violation of the Act by using unregisteredagents, improperly paying sales commissions to unregistered agents, failing to comply withthe prospectus requirements of the Act, making false representations in applications forregistration and amendments thereto, falsely naming an individual as a trading officerwhen another person was doing the job, leaving the Toronto trading office of the firmwithout a trading officer for some six months, and in other respects. The Commissionfound that the breaches of the Act were not isolated incidents, but were pervasive in all theoffices of the group of companies of which Qualico was a member (the "Qualico Group")and continued for an extended period of time.
Mr. Friesen and his father were part of the senior management of the Qualico Group,which was principally engaged in real estate development.
The Commission found that the uncontradicted evidence gave a clear picture of failure tosupervise on the part of Mr. Friesen and his father, and that they could not get out of theirresponsibility to supervise by saying that they relied on others, particularly their seniorpeople and the legal advice they might have been receiving. They were, in the words ofthe Commission, "interested in one thing, real estate sales and did not concern themselveswith the niceties of the Securities Act", which niceties, the Commission stated, are not justform but are for the protection of the public in precisely the circumstances of the case, thatis the sale of speculative real estate securities to a wide cross-section of the investingpublic.
The Commission concluded that it was important that the sanction against the Friesens,who had profited for so long by the Qualico Group's sales practices, reflect theseriousness of the continuing and pervasive breaches which the facts indicated, and thatthe sanction serve as a notice and deterrent to others who might be tempted to engage insales practices, purportedly through prospectus exemptions, that flout the requirementsof the Act, that the cost will be high.
The Commission determined that the Friesens could continue to carry on in real estatedevelopment, but ought not to be able to avail themselves of the Act and the exemptionsthereto to sell securities to the public, or to engage in the securities business in Ontarioagain except for trading for their personal accounts, and the Commission structured thesanction accordingly.
The facts on which the Commission's 1989 decision were based were set out in an agreedstatement of facts. We have reviewed this, and do not differ in any respect with the panelof the Commission which imposed the sanction. We would not, in any event, be preparedto second-guess the conclusions of that panel.
Mr. Friesen has applied under section 144 of the Act for an order amending or revokingthe Commission's 1989 order (the "1989 Order"). In his application, he submits that therehas been a material change in his circumstances, that he is remorseful and has learnedfrom his previous experience, and that it would not be prejudicial to the public interest toamend the 1989 Order so as to enable him to serve as a director and/or officer of areporting issuer.
In his application, Mr. Friesen also says that, since the making of the 1989 Order, he hasnot engaged, nor does he intend to engage, in selling securities to the public and that hisconcern with the continuing operation of the order is that "while the Order technically hasno impact on Mr. Friesen's ability to carry on business as a director of a public company,as a practical matter, the Order seriously affects his abilities in that regard". He says thathe has refrained from acting as a director of public companies because "There wereconcerns that Mr. Friesen's association with [a public company], because of the Order,would have had an adverse impact on the company's ability to raise capital in the capitalmarkets".
As is admitted by Mr. Friesen, the language of the 1989 Order does not preclude him fromacting as a director or officer of a public company. However, in his testimony before us,Mr. Friesen told us of situations in which he had been required to resign as a director, orit had been decided not to elect him as a director, of a reporting issuer which is a "publiccompany". Mr. Friesen testified that concerns were raised by counsel for the issuer thatMr. Friesen's presence on the board of the issuer would, at least, delay the listing of thesecurities of the issuer on a stock exchange, because of the existence of the 1989 Order.
In addition, we note that, under clause 61(2)(e) of the Act, the Director of the Commissionis prohibited from issuing a receipt for a prospectus if it appears to the Director that
"The past conduct of the issuer or an officer, director --- affords reasonable groundsfor the belief that the business of the issuer will not be conducted with integrity andin the best interests of its security holders."
The securities laws of other Canadian jurisdictions contain the same or a similar provision.
Subsection 144(1) of the Act permits the Commission to make an order revoking or varyinga decision of the Commission if in the Commission's opinion the order would not beprejudicial to the public interest. Under subsection 144(2), such an order may be madeon such terms and conditions as the Commission may impose.
As we have said, Mr. Friesen says that he has no intention of going back into the securitiesbusiness, and his counsel advised us that he would be prepared to so undertake to theCommission, and to have whatever section 144 order we may see fit to make conditionedon his not going back into the securities business. As we have also said, theCommission's concerns expressed in its 1989 decision were to ensure that Mr. Friesenwas never again engaged in the securities business.
In its decision in In the Matter of Bruce Orsini (1997), 20 OSCB 6068, the Commissionconsidered the circumstances in which it should make a section 144 order in cases of thissort. It said:
"We reviewed the 1991 Reasons for Decision of the Commission Panel, the 1991Settlement Agreement and the Order approving it. None of these gave us muchassistance. It is the conduct of the applicant since 1991 and the quality of theefforts he has made to rehabilitate himself and to purge himself of his guilt whichare most relevant in an application such as this.
In this regard we were urged by OSC staff counsel to follow the test set out inUltramar PLC and LASMO PLC (1991) 14 OSCB 5221 particularly at p.5222 wherethe OSC Panel concluded that Section 140 of the Act should not be applied "exceptin the most unusual circumstances". We concluded that the Ultramar case involvedfacts and circumstances that were sufficiently different from this application that itprovided little guidance to us. Counsel for the applicant persuasively convinced usthat we are correct in this.
As a result we were urged by both counsel to consider a number of cases whereapplications had been made under the Law Society Act for readmission and othercases."
After referring to these cases, the Commission concluded that:
"Amongst these we determined that the most helpful was Re: Weisman, Report toConvocation dated January 27, 1997. This case sets out seven criteria by whicha readmission application should be assessed. They are as follows:
1. As a general rule, an order such as the 1991 OSC order is intended to runits course. Varying or rescinding the order should be the exception ratherthan the rule.
2. The applicant must show by a sufficient course of conduct he is a person tobe trusted.
3. The applicant must show that his conduct is unimpeached andunimpeachable which can best be established by evidence of trustworthypersons, especially persons with whom the applicant has been associatedsince the 1991 OSC order.
4. A sufficient period of time must have elapsed before an application forreadmission will be granted.
5. The applicant must show by substantial and satisfactory evidence that it ishighly unlikely that the applicant will misconduct himself in future if theapplicable order is revoked or rescinded.
6. The applicant must show that his or her past conduct has been entirelypurged.
The seventh criteria in Weisman, that the applicant has remained currentprofessionally, is not relevant to this case.
Counsel for the applicant urged that each of these should be applied separatelyand seriatim to the facts. It was the Panel's view that the criteria should be appliedas a whole to the available evidence.
We have weighed all the evidence against these criteria and have determined notto grant the application. In doing so we were aware that the 1991 OSC Order willnot expire by its terms for 25 years and that accelerated rehabilitation of Mr. Orsiniwould accordingly be very desirable. We acknowledge his efforts in this regard butwithout a reasonable amount of third party corroborative evidence as to his conductand more compelling evidence that he has purged his serious misconduct thatresulted in the 1991 OSC Order we are unable to conclude otherwise than wehave."
It seems to us that criteria 2, 3, 5 and 6 can be summed up as follows, as applicable tocases of this sort. The applicant for a section 144 order in these circumstances must beable to convince the panel, by substantial and satisfactory evidence (including theevidence of trustworthy persons, especially persons with whom the applicant has beenassociated since the making of the order sought to be revoked or varied) that (a) thesanctions imposed on him or her in the original order are no longer necessary to protectinvestors and the marketplace because the applicant is a "changed person", having, in theperiod since the making of the order, completely rehabilitated himself or herself (or, to putit another way, "purged his or her past conduct") and (b) his or her conduct since the timeof the making of the original order shows that he or she can now be trusted not to engagein securities activities which are contrary to the public interest. This is, no doubt, a difficulttest to meet, but not an impossible one, which, in our view, is another way of statingcriterion 1.
As regards criterion 4, it seems to us that, in order to be able to show that criteria 2, 3, 5and 6 have been satisfied, a substantial period of time must have passed, during whichthe actions of the applicant can be assessed against the criteria. In addition, and quiteimportantly, since general deterrence is a consideration which may properly be taken intoaccount by the Commission in determining appropriate sanctions (see In the Matter ofLinden Dornford (1998), 21 OSCB 7345 at p. 7351), sanctions imposed in an order suchas the 1989 Order should not be modified until a sufficient period of time has passed tomake it clear that actions of the type on which the order is based will not, if taken byothers, be taken lightly by the Commission.
It could be argued that this case is an unusual one in which the criteria do not have to besatisfied because Mr. Friesen is prepared to have any section 144 order we might makeconditioned to prevent him from engaging in the securities business, which was what theCommission stated that it wished to achieve by the 1989 Order. However, as Mr. Ritchievery properly pointed out to us, we are required by section 144 to be satisfied, beforemaking a variation or revocation order under that section, that it would not be prejudicialto the public interest to do so. Although the 1989 Order was not, and could not be,directed to ensuring that Mr. Friesen could not serve as a director or officer of a reportingissuer, if it in fact it has had that effect then consideration of whether removing thatimpediment would be contrary to the public interest is, in our view, required. We have veryconsiderable doubt as to whether a person who exhibited such disregard for securitieslaws as the Commission, in its 1989 decision, found Mr. Friesen to have shown was aproper person to serve as a director or officer of a reporting issuer. It seems to us that, indeciding whether Mr. Friesen is now a proper person, we should be satisfied that at leastOrsini criteria 2, 3, 5 and 6 have been satisfied.
Accordingly, we must turn to the evidence submitted to us by counsel for Mr. Friesen todetermine whether Mr. Friesen has satisfied these Orsini criteria.
In support of his application, counsel for Mr. Friesen filed 23 affidavits, mainly frompersons engaged in the real estate industry in western Canada, all testifying as to Mr.Friesen's excellent character and/or business ability. Most opine, in one way or another,that there would be no risk to the public in allowing Mr. Friesen to buy and sell publiclytraded securities or to be involved in public companies. (We would note that there isnothing in the 1989 Order to prevent Mr. Friesen from buying or selling publicly tradedsecurities for his own account, provided, as regards sales, that he does so through aregistrant.) None of the affidavits deal with the question of whether Mr. Friesen should beallowed to engage in the securities business. This is not surprising, given that Mr. Friesenhas stated that he does not intend to do so.
Counsel for Mr. Friesen called as witnesses Carl James Cheverie and Dale Gillespie (eachof whom had sworn one of the affidavits which had been filed).
Mr. Cheverie is in the real estate investment business, and has been involved in the realestate business since 1973. His main occupation currently is as president of BirchwoodProperties Inc., which invests in projects in western Canada and the United States, andhe is also the president of Altius Capital Corporation, which is a mezzanine lendingcompany, lending money into residential real estate projects in Canada. Birchwood wasstarted in 1996, and Altius in 1997.
Mr. Cheverie's evidence was that he has known Mr. Friesen since the latter came toCalgary, meeting him a few times a year. Mr. Friesen is now an investor in Birchwood,having a 35% interest, and a director of that company, so they meet more regularly now.
It is Mr. Cheverie's evidence was that Mr. Friesen is a good director, comes to directors'meetings well prepared, and says what he thinks, and that he is a very thoughtful businessperson as a director.
Mr. Cheverie perceives Mr. Friesen as having a good reputation in the businesscommunity. He respects the way in which Mr. Friesen deals with people, and believes thathe is trustworthy. Mr. Cheverie believes that Mr. Friesen is an honest man, with high moraland family values, but does not know anything about Mr. Friesen's character or what hedoes.
Mr. Cheverie does not think that Mr. Friesen would be a danger to the public in being adirector of a public company or whatever else he wants to do in the public securitiessphere. He would have no concerns about Mr. Friesen's active management of a publiccompany.
Dale Gillespie is the chief executive officer of Liquidation World, which liquidatesinventories for banks, receivers, insurance companies and others. Liquidation World islisted on The Toronto Stock Exchange and NASDAQ.
Mr. Gillespie has known Mr. Friesen for 15 or 16 years. Mr. Friesen was one of theoriginal investors in Liquidation World, and was a member of its board until it madeapplication for listing on The Toronto Stock Exchange, at which time Mr. Gillespie was toldby Liquidation World's legal advisors that it would not be in the company's best interestsfor Mr. Friesen to continue to sit on its board.
Mr. Gillespie finds Mr. Friesen to be trustworthy. When Mr. Friesen was on LiquidationWorld's board, he asked all the difficult questions, he wanted to make sure that thecompany was living up to all of its obligations and looking into the financial side of things.He was one of the more difficult board members to deal with. He has a tremendousknowledge of business, and a wide variety of business activities, and is involved at thegrassroots of business.
In Mr. Gillespie's view, Mr. Friesen has an outstanding reputation in the businesscommunity. "Bob is somebody you don't question. His integrity is above all."
Mr. Gillespie knows nothing about the facts underlying the 1989 Order. He did notunderstand what Mr. Friesen was seeking from the Commission in these proceedings.
Mr. Gillespie confirmed that Mr. Friesen was on the board of Liquidation World when it waslisted on the Alberta Stock Exchange.
Mr. Friesen also gave evidence before us. He is 53 years of age, and since April of 1998has been the president and general manager of UBG Inc., which owns a group of housebuilding companies active in Edmonton and Calgary. He left Qualico Developments inApril of 1998 as a result of disagreements with the other shareholders, being members ofhis family.
Mr. Friesen said that, on three different occasions, counsel for companies that were goingpublic made a decision that Mr. Friesen would be a detriment and a delay to their action,and he was asked to step down as a director, which he did. Liquidation World was oneof these companies. Daytona Homes Ltd. was another. In each case, the 1989 Order wasthe reason.
At the present time, Mr. Friesen does not take any issue with the sanctions imposed by the1989 Order.
Since the date of the 1989 Order Mr. Friesen has not had any involvement with anysecurities registrant.
Mr. Friesen testified that, as a result of the Commission's 1989 decision, he has learnedthat when he is given a position of responsibility, he better have the authority to deal withit, and the proper education to deal with that responsibility and conduct things in a propermanner, and if he doesn't feel that he is capable, he had better not take the position andthat this is the way that he has conducted himself since the 1989 Order.
Mr. Friesen's counsel asked him why he wanted to have the 1989 Order varied. Hisresponse was as follows.
"Because I do think it inhibits my ability to become involved with public companies.That is from a practical point of view, but I also, I do believe that I frankly think I ambetter as a result...okay. I mean, it is a hard way to learn, but I do act differentlyand I think I am a much more, I guess you could use the term critical when I aminvolved in something, because I am concerned. I will make sure that this doesn'thappen again, whether it is because of my own action or whether I make darn surethat I have the right advisors...effectively, I have learned something the hard way."
Mr. Friesen's counsel asked him how he felt about his conduct that gave rise to the 1989Order. His response was as follows.
"My conduct was unacceptable. I should have had the proper education, and Ishould have...if I didn't...well, I should have gotten the proper education, not justhad it. I should have gotten it, and even with the proper education, I should havehad proper people in place or I shouldn't have accepted a position which has withit certain levels of responsibility if I wasn't going to do it or, for that matter, didn'thave the ability to do it, and that was the case in both circumstances. I didn't dealwith my responsibilities properly.
Q. Do you feel in that regard that you have learned from this?
A. Yes, I have learned an awful lot from this."
On the evidence, we are satisfied that the Orsini criteria have been met to the extentnecessary to vary the 1989 Order to the extent needed to permit Mr. Friesen to act as adirector and/or officer of a reporting issuer. In his evidence, Mr. Friesen acknowledgedthat he should not, and did not wish to, engage in the securities business, and we agreewith his conclusion that he has neither the background nor the experience which wouldenable him to do so. Nor are we satisfied that the evidence presented to us, which, as wehave said, was not specifically directed to the question of Mr. Friesen's participation in thesecurities business, was sufficient to satisfy the Orsini criteria in this regard.
Ms. Manarin suggested to us that, if we found that it would not be contrary to the publicinterest for Mr. Friesen to act as a director or officer of a reporting issuer, we should notdisturb the operative part of the 1989 Order which prevents Mr. Friesen from participatingin the securities business, but rather indicate in some manner our view as to his acting asa director or officer. We agree that this would be the best approach.
Accordingly we will order the variation of the 1989 Order by adding thereto the followingproviso:
"Provided that nothing contained in this Order shall be interpreted so as to form abasis for concluding that it would in any way be improper or against the publicinterest for Robert Arthur Friesen to be or act as an officer and/or director of areporting issuer or as a conclusion by the Commission that there are reasonablegrounds for belief that the business of an issuer will not be conducted with integrityand in the best interests of its security holders by reason of his acting as a directorand/or officer of the issuer."
April 20, 1999."J. A. Geller"
"Howard I. Wetston"
"Stephen N. Adams"