R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
CRAIG ALAN JAYNES
Decision and Reasons for Decision
February 2, 2000
Susan Wolburgh Jenah - General Counsel
Steven Sofer - For the Applicant Craig Alan Jaynes
David Hausman - For the Staff of the Ontario Securities Commission
DECISION AND REASONS FOR DECISION
The decision of the Director was to refuse the request by Craig Alan Jaynes ("Mr. Jaynes"or the "Applicant") for reinstatement of his registration as a salesperson. This decisionwas issued by the Director on February 7, 2000, with notice that reasons for decisionwould follow at a later date. These are the reasons for decision.
The Applicant was previously employed as a salesperson at Marchment & MacKay Limited("Marchment"), a former securities dealer whose registration was terminated by theCommission by an Order issued by the Commission on August 3, 1999, pursuant tosection 127 of the Securities Act (the "Act").
Prior to the Commission Order terminating Marchment's registration, Mr. Jaynes resignedfrom the firm, the effect of which was the automatic suspension of Mr. Jaynes' registrationas a salesperson by operation of subsection 25(2) of the Act which says that:
(2) Termination re salesman -- The termination of the employment of asalesperson with a registered dealer shall operate as a suspension of theregistration of the salesperson until notice in writing has been received bythe Director from another registered dealer of the employment of thesalesperson by the other registered dealer and the reinstatement of theregistration has been approved by the Director.
The Applicant's registration as a salesperson continues to be suspended until the twoconditions set out in subsection 25(2) are met: first, notice is received from anotherregistered dealer of employment of the salesperson and, secondly, reinstatement of theregistration is approved by the Director.
A notice dated August 9, 1999 from Buckingham Securities Corporation, a securitiesdealer under the Act, was received by the Director and, accordingly, the first conditionnoted above has been satisfied.
However, Staff of the Registration Branch of the Commission opposed the reinstatementof the Applicant's registration and, accordingly, a hearing was convened before theDirector on February 2, 2000 pursuant to subsection 26(3) of the Act which provides that:
(3) Refusal - The Director shall not refuse to grant, renew, reinstate or amendregistration or impose terms and conditions thereon without giving theapplicant an opportunity to be heard.
The other provision which is relevant to this hearing is subsection 26(1) of the Act whichprovides as follows:
(1) Granting of registration - Unless it appears to the Director that the applicantis not suitable for registration, renewal of registration or reinstatement ofregistration or that the proposed registration, renewal of registration,reinstatement of registration or amendment to registration is objectionable,the Director shall grant registration, renewal of registration, reinstatement ofregistration or amendment to registration to an applicant.
At the hearing, both Mr. Sofer, Counsel for Mr. Jaynes, and Mr. Hausman, Counsel forStaff of the Commission, made brief opening statements. Mr. Sofer then proceeded toexamine his client, Mr. Jaynes, followed by a cross-examination by Mr. Hausman. A binderentitled "Documents to be Used on Cross-Examination of Craig Jaynes" was provided tothe Director at the hearing. There was a brief re-examination by Mr. Sofer and then bothMr. Sofer and Mr. Hausman made their closing submissions. A bound book of precedentsentitled "Joint Brief of Authorities" was also provided to the Director at the hearing and wasreferred to by both Counsel in their closing submissions.
The only evidence presented at the hearing was that of Mr. Jaynes. It was established atthe hearing that Craig Jaynes is 31 years old and that the only jobs he has had sincegraduating from Brock University with a Business Administration degree in 1994 areworking at a supermarket and subsequently being trained as a broker dealer atMarchment. He commenced employment at Marchment as a "qualifier" in November 1995.He began working as a salesperson in approximately January 1997 and resigned from thefirm in July 1999, days after the Commission released its decision, with reasons to follow,finding that Marchment had contravened the Act and just prior to Marchment filing anassignment in bankruptcy. It was stipulated at the hearing that Mr Jaynes' name did notcome up in the course of the Commission's lengthy hearing with regard to Marchment andcertain others named in those proceedings.
On August 9, 1999, Mr Jaynes applied to have his registration reinstated at BuckinghamSecurities. He heard from Staff on September 20, 1999, at which time they decided toconduct a section 31 examination of Mr. Jaynes which took place on September 29, 1999.On December 16, 1999, Mr. Jaynes received a letter from Staff indicating that he hadfailed to comply with his client obligations and that he had generally failed to act in goodfaith in dealing with his clients. This letter was not produced or entered into evidence atthe hearing. On December 22, 1999, Mr. Sofer requested a hearing before the Directorwhich was held on February 2, 2000.
The following is a brief summary of the relevant evidence adduced at the hearing.
Mr. Jaynes acknowledged in his evidence that he repeatedly breached his obligations asa registrant during the course of his employment at Marchment when engaged in the saleof principal securities that were promoted by Marchment. He freely admitted that he didnot act in his clients' best interests in virtually all of the instances in which he sold theseprincipal securities to his clients.
While initially engaged as a "qualifier" at Marchment, Mr. Jaynes spent a good deal of histime on the phone, "cold-calling" individuals to solicit investment interest and their consentto receive market information from Marchment.
During this time, he learned that Marchment's business was basically twofold: one sidefocused on the sale of speculative securities promoted by Marchment and with respect towhich they were acting as principal; the other side of the business was an agency-typebusiness and focused primarily on mutual fund sales. He also learned that Marchmentgenerally used high pressure sales tactics on the principal side of its business.
Mr. Jaynes testified that at the time he applied to the Commission for registration, he didnot know that a Notice of Hearing had been issued against Marchment. He did learn thatMarchment was having troubles with the Commission but he was unaware of the natureand extent of these problems which were downplayed by Marchment management whomaintained that the Commission's allegations were unfounded. Mr. Jaynes said that hebelieved Marchment management at the time.
Mr. Jaynes went through a training program at Marchment, two-thirds of which focused onmaterials provided by The Canadian Securities Institute and the last third of which trainedemployees on how to sell principal stock to clients and make it "more attractive" to them.
Mr. Jaynes said that he was uncomfortable both with this latter aspect of the training andwith this side of Marchment's business but stayed at the firm and, realizing how difficult itwould be to build a "book of business", decided to sell the principal stock promoted byMarchment on a "fairly consistent basis."
Mr. Jaynes said that he knew that Marchment was "dictating the price of" the speculative,principal stock he was selling and that "once the promotion stopped, you would see adecrease in the price strictly because Marchment had stopped promoting it." While at firsthe was not aware of the severity of the drop in price during the first six months, he soonthereafter became aware when a senior salesperson at Marchment, Norm Frydrych,agreed to testify for the Commission in order to settle charges against him in connectionwith the Commission's pending proceedings against Marchment. Upon reviewing Mr.Frydrych's testimony, Mr. Jaynes became aware that "a large portion of the clients or allof the clients he dealt with lost a large portion of the money that they had invested."Marchment continued to try to dismiss their problems with the Commission throughout theperiod in question. Mr. Jaynes continued to rely on Marchment management'sprotestations that the Commission's allegations were unfounded, that the principalsecurities Marchment was promoting were of "better quality" and that Marchment waslooking to re-focus their business on the "agency side" and obtain a seat on the TorontoStock Exchange.
Mr. Jaynes testified that he applied high pressure sales tactics in selling principal stockto his clients and that he would generally indicate some urgency to acquiring the stock inquestion. He explained that he would complete the necessary client information forms thatare intended to provide the requisite information to enable a registrant to properlydischarge their "suitability" and "know-your-client" obligations only after they had beensolicited by Mr. Jaynes to buy principal stock and had expressed interest in doing so. Hestated in his evidence that he did not realize that he was breaching his obligations as aregistrant when he was engaged in the conduct he was describing but now understandsthat he did, in fact, do so.
Mr. Jaynes described the type of clients he was dealing with at Marchment on the"principal side of the business" as having "very limited or fairly limited knowledge of theinvestment industry as a whole." Their investment experience was largely limited to mutualfund investing, GIC-type products and such. The average client had a fairly modestincome and net worth. Approximately 30 per cent of Mr. Jaynes' clients did not, in fact,end up paying for the principal stock he had sold them and their trades were offset. Hesaid he was aware this was a high cancellation rate but "justified it in his mind".
Mr. Jaynes explained that, as a junior salesperson at Marchment, he would make an initialtrade of a relatively small amount of stock that Marchment was promoting at the time. Afterthis initial trade, and unbeknownst to the client, their account would be passed along to asenior salesperson who would try to sell them larger quantities of the stock fromMarchment's inventory. Mr. Jaynes did not disclose to his clients how much commissionhe was earning, nor did he disclose that he would lose his commission if the client wereto sell the stock in the three months immediately following its purchase.
While Mr. Jaynes continued to sell principal stock from Marchment's inventory virtuallyuntil he resigned, he testified that he experienced a drop in his employment income duringthe last phase of his employment at Marchment that was attributable to the fact that hebecame disinterested in selling speculative stock. He continued to do so in order toappease management but his business focus shifted from being mainly "principal trade"focused to being 90 per cent "agency trade" focused.
Mr. Jaynes reiterated throughout his evidence-in-chief that, throughout his employment atMarchment, agency trades were processed in accordance with his obligations as aregistrant and with the clients' best interests in mind. He repeatedly emphasized that hisreal goal was to "build a book of business" and be able to service his clients throughagency trades. In other words, the principal trades he transacted were really just a meansto an end and an aspect of his employment that he was uncomfortable with from inception.
Mr. Jaynes acknowledged that he made serious mistakes but that those mistakes are notreflective of his true character, that he really wants to continue in the industry as a brokerand have another opportunity to nurture relationships with clients in future.
In the course of cross-examination, Mr. Hausman established that Mr. Jaynes hadcompleted the Canadian Securities Course in 1995 and also took the Conduct andPractices Course. It was established that the Conduct and Practices Handbook containedimportant professional and ethical standards intended to govern all registrants' conduct.
Mr. Jaynes admitted that he sold a number of stocks, such as Partner Jet, AMT FineFoods, Golf North Properties, SFP Communication and CTM Cafés Limited, to his clientsat prices that were substantially higher than the acquisition cost of the securities toMarchment. Mr. Jaynes knew that Marchment marked up the price for its principalsecurities in specific increments, that the price typically increased between the time thejunior salesperson made the initial trade and the time the customer's file was passed onto a senior salesperson and that the increase in price was designed to entice the client topurchase additional securities. He knew but did not disclose this information to his clientsand also knew what the role of the senior salespeople at Marchment was and that theywere adept at preventing clients from selling stock purchased from Marchment's inventory.He also know that if clients continued to hold the stock, it would eventually decline in valueto such an extent that the client would lose a significant portion of their investment.
Mr. Jaynes explained that he received a 17.5 per cent commission on the sale of principalstock and half that amount for subsequent trades by senior salespersons. For agencytrades he would receive 1-to-1.5 per cent commission only.
Mr. Hausman took us through a number of new application forms for clients of Mr. Jaynesthat were included in the "Documents" binder, including those relating to Mr. Ron Clark,Mr. Walter Weinreich, Mr. Bill Turner and Mr. Bruce Webster. While the personalcircumstances of each of these individuals varied, they all had in common limitedinvestment experience and knowledge as well as, in some cases, limited annual incomeand/or net worth.
Mr. Jaynes admitted that he would try to elicit a commitment from prospective investors toacquire a certain number of shares from Marchment's principal position before obtainingany new client information. As a result, numerous trades were made that were unsuitablein view of the client's income, assets and objectives. While Mr. Jaynes acknowledged thisat the hearing, he also appeared to be saying that he did not, at the time he recommendedthese trades to his clients, believe them to be unsuitable.
Mr. Hausman established that there were salespeople at Marchment who did not engagein principal trading at all and conducted an agency business only and that Mr. Jaynescould have done so as well (albeit Mr. Jaynes said that this would have been very difficultand that he believes he would have been asked to leave Marchment eventually).
In conclusion, Mr. Hausman established that Mr. Jaynes has not taken any courses,offered any apology or financial restitution to his "principal" clients and had, since leavingMarchment, contacted only the "agency" clients who he hoped would form his "book ofbusiness" at Buckingham Securities.
The re-examination was directed to three items only: confirming that Mr. Jaynes believedthat he had client authorization for certain trades in principal stock which were effectedtowards the end of his employment at Marchment, confirming that he believed there wasreal value inherent in the Golf North shares he had sold to his clients and attempting toestablish how Mr. Jaynes would behave differently today in assessing client suitability anddischarging his other obligations as a registrant.
SUMMARY OF APPLICANT'S SUBMISSIONS
Counsel for the Applicant submitted that the onus is on Staff to demonstrate that Mr.Jaynes is not "suitable for reinstatement of registration" or that his "proposed reinstatementof registration is objectionable" within the meaning of subsection 26(1) of the Act.
Counsel for the Applicant conceded that there is no doubt that Mr. Jaynes breached hisobligations as a registrant while employed at Marchment. However, he argued that thehearing was really about whether there is a reasonable likelihood that the objectionableconduct in question, which was admitted to by Mr. Jaynes in the evidence he gave at thehearing, would be reasonably likely to continue. He submitted that the answer to thisquestion ought to be "No" in light of the terms and conditions that he is willing to acceptbe imposed and, accordingly, Mr. Jaynes should be reinstated, bearing in mind that he hasalready been effectively suspended for a period of six months dating back to thetermination of his employment at Marchment.
Mr. Sofer conceded that, had Mr. Jaynes been named in the Notice of Hearing issuedagainst Marchment et al, and if the same evidence that he willingly offered up at thishearing had been presented against him, sanctions might well have been imposed againsthim. Mr. Sofer argued that there were, however, thirteen mitigating factors, some of whichare discussed below. He also discussed a number of previous decisions with a view toestablishing that a six month "suspension", effectively, is sufficient for someone in Mr.Jaynes' circumstances.
SUMMARY OF STAFF'S SUBMISSIONS
Counsel for Staff agreed that the onus of proof in this case is on Staff. He submitted that,since Mr. Jaynes admitted his conduct was inappropriate and that he had breached hisfundamental duties as a registrant to act honestly, in good faith and in the best interestsof his clients, and to fulfill the suitability and know-your-client obligations, his reinstatementis, prima facie, objectionable.
Mr. Hausman argued that Mr. Jaynes' past conduct is all that we have to go on inassessing his suitability as a registrant today since no evidence whatsoever was putforward by the Applicant to dispel that inference based on his past conduct. In otherwords, since Mr. Jaynes' suspension of registration, he has not undertaken any positiveand concrete steps that could be considered by the Director to counter-balance thelikelihood of his past conduct being a predictor of his future conduct.
Mr. Hausman noted that Mr. Jaynes had contacted only his "agency" clients fromMarchment but had made no similar effort to contact his "principal" clients to apologize forhis actions, that no contrition or explanation was offered in his application for reinstatementand that the only mitigating factor of relevance is that he was candid in admitting his pastwrongs. Mr. Hausman argued that one cannot attach much weight to this mitigating factorsince Mr. Jaynes had, in effect, no choice given the Commission's decision and findingsin the Marchment case. It would have been "foolish to deny it", in Mr. Hausman's words.
In addition, Mr. Hausman argued that general deterrence is an appropriate considerationfor the Director to bear in mind in rendering this decision.
Mr. Jaynes' conduct fell far short of that expected of a registrant. Instead of acting in hisclients' best interests, he acted contrary to their interests and in a manner intended tofurther his own economic interests.
Mr. Sofer said that there were thirteen mitigating factors that I should consider. I haveconsidered all of the factors cited in coming to my decision and wish to address some ofthem. Mr. Sofer noted that his client admitted his breach, expresses remorse and willinglyfaces up to his conduct, of which he is now ashamed. In this regard, Mr. Sofer argued thathis client's demeanor is distinguishable from numerous respondents cited in many of theprecedents and, indeed, from those individual respondents named in the Marchmentproceeding who denied their wrongdoing throughout. Mr. Hausman, on the other hand,argued that these "mitigating factors" ought to be afforded little weight since, in the faceof the decision in Marchment, Mr. Jaynes had little choice but to admit his wrongdoing.In other words, given that Mr. Jaynes was applying for reinstatement of his registration, itwould have been counter-productive and contrary to his own interests to attempt to denyhis wrongdoing.
While there is truth to what Mr. Hausman says, this goes to the weight to be afforded thesemitigating factors. Mr. Jaynes' willingness to assume responsibility for his conduct isrelevant and I do afford it some weight. However, I am inclined to attach less weight to thiswillingness to assume responsibility for his wrongdoing coming, as it does, "so late in theday". Throughout his evidence, Mr. Jaynes stressed the fact that he felt uncomfortablewith the "principal side of the business" he was involved in at Marchment. This discomfortbegan with the training program and lasted throughout his employment. Still, despite this"discomfort", and despite the fact that he knew Marchment was having regulatory problemswith the Commission and that the Commission had commenced proceedings againstMarchment and others, Mr. Jaynes stayed at Marchment until the day it declaredbankruptcy and continued to engage in inappropriate trades of "principal" stock. Mr.Jaynes chose to believe Marchment management throughout this period when it deniedany wrongdoing and dismissed the Commission's proceedings as unfounded. It appearsto me that Mr. Jaynes was "uncomfortable", according to his testimony, because he knewthat what he was doing was wrong. Willful blindness is not a proper or compellingdefence.
Mr. Sofer compared his client's situation to that of Mr. Frydrych who, as noted above,assisted the Commission Staff by testifying against Marchment in order to settle chargesagainst him. In return for his testimony, Mr. Frydrych allegedly had his registrationsuspended for a period of 90 days. Mr. Sofer noted that Mr. Frydrych worked at the samebrokerage firm as Mr. Jaynes, had worked there for a much longer period of time, andadmitted the same wrongdoings as Mr. Jaynes. I do not think it is appropriate orinstructive to draw comparisons between these two situations. Neither is it appropriate tonow effectively second-guess what may have motivated the settlement with Mr. Frydrych.The fact is that he willingly agreed to admit his wrongdoing early on in the process inreturn for a negotiated settlement with terms that included a period of suspension. Iassume that Mr. Frydrych's testimony was critical in advancing the Staff's case againstMarchment and the other respondents named in those proceedings. In this regard, thesesituations are in no way comparable and I reject the suggestion that they are.
The sixth mitigating factor that Mr. Sofer cited is that Mr. Jaynes was "caught in the middleof a broker dealer problem" which the Commission was aware of but allowed to continuefor a long period of time. While Mr. Sofer acknowledged that this does not excuse hisclient's conduct, he argued it is a mitigating factor that goes to penalty in that, had he beenemployed by a different broker dealer, his application would have been routinely approved.Likewise, Mr. Sofer argued, had Mr. Jaynes applied for a transfer several months beforehe did, he would not have been subjected to a section 31 examination and his applicationwould simply have been processed "in the ordinary course."
Mr. Hausman acknowledged that former salespeople at Marchment found employmentelsewhere throughout the period of time that the Marchment proceedings were pendingand that no objection was taken to their reinstatement of registration. He said that, whilethis "is a shame", it does not mean that their reinstatement was consistent with the publicinterest. It only means that there were no findings yet in the Commission proceedingsagainst Marchment, a process that took 45 days of evidence and spanned approximatelythree years. I agree that fairness and consistency of treatment is an important regulatoryconsideration. However, I cannot let this consideration dictate an inappropriate result inthis case. The facts and evidence before me in this hearing relate to Mr. Jaynes and MrJaynes only. My findings are necessarily confined to those facts and that evidence.
Lastly, I have concerns, based on Mr Jaynes' evidence at the hearing, as to whether he,in fact, understands what is entailed in addressing "suitability" and "know your client"obligations. Mr. Jaynes' responses with regard to these issues were confused; heappeared to be saying that there is nothing wrong with executing speculative trades forclients provided they have indicated that they have a certain level of tolerance for risk. Infact, notwithstanding what a client may indicate as their risk tolerance level, speculativetrades may be wholly unsuitable based on their personal circumstances; a registrant'sresponsibility is to properly identify when this is the case and even refuse to executeunsuitable trades on behalf of a client when necessary.
ABILITY OF DIRECTOR TO REINSTATE SUBJECT TO TERMS AND CONDITIONS
Both Counsel for the Applicant and Counsel for Staff agreed that it would be open to theDirector to approve the transfer and so, effectively, reinstate Mr. Jaynes' registration andthen impose terms and conditions on that registration pursuant to subsection 26(2) of theAct. Both Counsel further agreed that there was considerable discretion vested in theDirector under subsection 26(2) to determine what the appropriate terms and conditionsshould be.
A number of possible terms and conditions of registration were referenced during thehearing. They were as follows:
1. That Mr. Jaynes successfully re-take the "Conduct and Practices Course" and nottrade until it has been completed;
2. That Mr. Jaynes never sell stocks again as "principal" but only on an "agency"basis;
3. That Mr. Jaynes be restricted for a period of three years to selling stocks listed oneither the TSE or the NYSE or stocks that comprise a part of the S&P 500 orNASDAQ 100 and that he be permitted to sell mutual fund shares and units; and
4. That Mr. Jaynes operate under strict supervision for as long as the Director deemsnecessary.
While Mr. Sofer indicated that he was not prepared to concede that the conditions notedabove were either necessary or deserved in the circumstances, he noted that with theimposition of these conditions of registration, the Director should be satisfied and shouldreinstate Mr. Jaynes.
Mr. Hausman, on the other hand, argued that the purpose of the hearing was to determinewhether the transfer of Mr. Jaynes' registration is "objectionable" and whether it isrendered less so by the imposition of terms and conditions.
For the reasons set out above, Mr. Hausman argued that the imposition of terms andconditions would not be sufficient in the circumstances. He referred me to the decision ofthe Commission dated July 27, 1972, contained at Tab 5 in the Book of Authorities andentitled "In the Matter of Section 28 of the Securities Act and In the Matter of JamesJeffrey Forsythe." This case involved an appeal to the Commission from a decision of theDirector to refuse the request of the applicant, Mr. Forsythe, for transfer of registration toa broker. The following paragraph appears at page 170 of the Forsythe decision:
"It was submitted that we may safely reinstate his registration subject tosuitable terms and conditions concerning the kinds of securities which hemay be permitted to recommend to his clients. This solution is not practicalsince a salesman must be in a position to fully service his clients accordingto their needs and requirements. We are of the opinion that the conclusionsreached by the Director are correct and that in effect the registration ofJames Jeffrey Forsythe should be cancelled."
These concerns are as relevant today as they were in 1972. While terms and conditionsrestricting registration may be appropriate in a wide variety of circumstances, they shouldnot be used to "shore up" a fundamentally objectionable registration. To do so would beto create the very real risk that a client's interests cannot be effectively served due to theseverity and extent of the restrictions imposed.
As I have decided against reinstatement at this time, it is unnecessary for me to deal withthe issue of what terms and conditions of registration, if any, would be appropriate in theevent that Mr. Jaynes re-applies for reinstatement of his registration at some future time.However, I have decided that it is appropriate to offer guidance on this matter both for thebenefit of Mr. Jaynes so that, should he be inclined to so re-apply, he has some indicationof what terms and conditions would, in the Director's view, be appropriate, and to assistthe Staff should they have to deal with such a request in the future.
In my view, it would be very appropriate for Mr. Jaynes to re-take the "Conduct andPractices Course."
That Mr. Jaynes not sell stocks as "principal" but only on an "agency basis would also bea prudent restriction in light of his past conduct and not one that would be likely toprejudice his ability to "fully service his clients according to their needs and requirements"as noted in Forsythe.
However, condition #3 relating to selling stocks listed only on a limited number ofexchanges or which form part of certain indices could prejudice his clients as per theForsythe case and so the need for such a restriction should be carefully evaluated in lightof all the other facts and circumstances at the relevant time.
A condition requiring strict supervision would be quite appropriate and in keeping with theCommission's investor protection mandate. I would be inclined to go further and requireperiodic reports to be filed with the Director by the Applicant's supervisor at the time sothat the registrant's conduct and practices could be monitored by the Director on anongoing basis for an appropriate period of time.
Mr. Sofer advanced a somewhat novel argument that the Director has the authority undersubsection 26(3) to order reinstatement subject to the "term" or "condition" that it not beeffective before a certain date. Similarly, the Director might order immediate reinstatementbut with a "term" or "condition" that the registrant is not able to trade for a specified periodof time.
Both of these approaches are, in effect, tantamount to the Director imposing a period ofsuspension of registration, a power expressly conferred upon the Commission undersection 127 of the Act but not expressly conferred upon the Director under section 26 ofthe Act.
While such an approach would indeed offer the Applicant more certainty in terms of hisfuture, the difficulty is that they would require the Director to issue an order which isinherently inconsistent and contradictory. To order reinstatement, with or without termsand conditions, requires the Director to find an applicant to be suitable for reinstatementof registration and to conclude that the reinstatement of registration is not objectionable.Imposing a term or condition on reinstatement that, in effect, prevents a registrant from"trading" is tantamount to refusing the reinstatement since the ability to trade is theessence of the registration. To find an applicant suitable for purposes of reinstatement ofregistration and, at the same time, find that it would be inappropriate to allow the applicantto trade, renders the registration meaningless and sends an equivocal message. I havenot seen fit to do so.
However, as was noted by Mr. Sofer, if Mr Jaynes had been named in the Notice ofHearing issued by the Commission, he would likely have had some sanction imposedagainst him but he would have the benefit of certainty in knowing how long he had to waitbefore he could resume a career in the industry. In sum, Mr. Sofer said "he needs someguidance as to what his future should be", in the absence of which, as Mr. Sofer said atthe hearing, Mr. Jaynes could "reapply tomorrow and then if he gets denied, he'll applyagain."
I am mindful of the Court of Appeal decision in the Latimer case which stressed that theCommission must deal fairly with those whose livelihood is in its hands in the course ofdischarging its duty to protect the public from the misconduct of its registrants. In viewof my finding that Mr. Jaynes does not meet the test for reinstatement of registration asset out in subsection 26(1) of the Act at this time, it is not, strictly speaking, necessaryfor me to address the appropriateness of certain terms and conditions of registrationbut I have done so (see the discussion above) in fairness to the Applicant. Similarly,and although not necessary in view of my decision, I have chosen to squarely addressthe question raised by Mr. Sofer at the hearing regarding when and under whatcircumstances it might be appropriate for Mr. Jaynes to re-apply for reinstatement ofregistration.
In my view, it would be inappropriate for Mr. Jaynes to "reapply tomorrow" assuggested. Mr. Jaynes should re-take the "Conduct and Practices Course" andassimilate the principles it espouses so that his conduct can fully reflect theseprinciples in future. If Mr. Jaynes is able to secure employment, albeit in a non-registered capacity, with a reputable registrant that fosters a strong and pervasiveculture of compliance with fundamental obligations to clients, this would, in my view, bean important factor to consider in any future application made by Mr. Jaynes (although Irealize it might well be difficult to secure employment on this basis).
Although I have no authority to prevent Mr. Jaynes from re-applying for reinstatement ofregistration for a certain period of time, I think it would be appropriate for there to besome further period of reflection and opportunity to address some of the other mattersidentified above which continue to be of concern. In the event that Mr. Jaynes decidesto re-apply at a future point in time, he will need to be in a position to demonstrate,through positive actions he has undertaken in the interim, that he will be able to live upto his obligations as a registrant in future. This is appropriate in view of all of thecircumstances including the seriousness of the misconduct in question, the mitigatingfactors in this case, the orders that were issued by the Commission against the othersenior salespeople in the Marchment proceeding and upon consideration of theprecedents cited in this hearing.
THE PRINCIPLE OF GENERAL DETERRENCE
Mr. Hausman argued that I should have regard to the principle of general deterrence inmaking my decision. He emphasized that it is important to send a clear message thatthe type of conduct engaged in by Mr. Jaynes will not be tolerated by the Commission;that, in Mr. Hausman's words, "it's not so easy to jump ship and go elsewhere."
In this regard, I was referred to two precedent decisions of the Commission, oneinvolving Mithras Management Ltd. et al, included at Tab 1 of the Book of Authorities,and the other relating to Linden Dornford, included at Tab 2 of the Book of Authorities.
The Mithras decision of the Commission, dated April 24, 1990, resulted in "publicinterest" orders against certain of the Respondents in that proceeding. Mr. Hausmanreferred me to the following oft-quoted passage from the Mithras decision:
". . . the role of this Commission is to protect the public interest byremoving from the capital markets . . . wholly or partially, permanently ortemporarily, as the circumstances may warrant . . . those whose conductin the past leads us to conclude that their conduct in the future may wellbe detrimental to the integrity of those capital markets. We are not hereto punish past conduct; that is the role of the courts, particularly undersection 118 of the Act. We are here to restrain, as best we can, futureconduct that is likely to be prejudicial to the public interest in havingcapital markets that are both fair and efficient. In so doing we must, ofnecessity, look to past conduct as a guide to what we believe a person'sfuture conduct might reasonably be expected to be; we are not prescient,after all." [underlining added, pp.10-11 of Mithras decision]
I was also referred to the Dornford case which involved the question of whether theregistration granted to Linden Dornford ought to be terminated or suspended for someperiod of time. In the Dornford decision, the Commission cites the above passage fromthe Mithras decision (at p.8). Counsel for Mr. Dornford argued before the Commissionthat "general deterrence is only an applicable consideration in a punitive proceeding,and not in a prophylactic public-interest one" (at p.16). The Commission disagreed,stating as follows:
"In our view, taking into account general deterrence, in the case beforeus, would not be for the purpose of punishing Dornford, as argued by Mr.Douglas, but rather for . . . the future protection of the marketplace notonly from the actions by Mr. Dornford but also from breaches of trust byothers. Although Mithras speaks of deterring future improper conduct of arespondent, it does note that the Commission is "here to restrain, as bestwe can, future conduct that is likely to be prejudicial to the public interestin having capital markets that are both fair and efficient." It seems to usthat . . . general deterrence . . . can be taken into account in determiningwhat is necessary to restrain conduct by others that is likely to beprejudicial to the public interest in having capital markets that are fair andefficient.
In our view, general deterrence is not inconsistent with Mithras . . . but is rather a glosson Mithras.
Accordingly, in deciding what sanctions are required under clause 127(1)1, we will takeinto account general deterrence." [underlining added, pp.19-20 of Dornford decision]
I agree that the Mithras and Dornford decisions are very relevant in this case in termsof the important principles that they establish.
I further find that the Dornford decision clearly established that general deterrence is anappropriate consideration for the Commission to take into account and, by extension, isalso important for the Director to take into account in this context.
The Commission's mandate includes the protection of investors. The Director's actionsin determining whether the Applicant is suitable for reinstatement of registration mustbe undertaken in a manner consistent with that mandate. To do otherwise would beinconsistent with the Director's responsibilities under the Act.
In my view, to reinstate Mr. Jaynes at this time despite his inappropriate past conductand serious breaches of his duties as a registrant, even with conditions or restrictionson his registration, would be to send an unequivocal message to the marketplace thatsuch conduct has little consequence. Such a message would be inconsistent with theDirector's obligation to act in accordance with the Commission's investor protectionmandate. Mr. Jaynes' conduct as a registrant had clear consequences for many of hisclients at Marchment. That such conduct should have little or no consequences for Mr.Jaynes, or indeed others who would follow his example and breach their obligations inlike fashion, is inconceivable and wholly inconsistent with the important principle ofgeneral deterrence as articulated and considered by the Commission in the Dornforddecision.
February 29th, 2000.