Proceedings

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IN THE MATTER OF THE SECURITIES ACT,
RSO 1990, c S.5

- AND -

IN THE MATTER OF
AOUAD CHOUFI
REASONS AND DECISION

(Subsections 127(1) and (10) of the Act)



Hearing:

In writing

 

 

 

Decision:

August 19, 2016

 

 

 

Panel:

D. Grant Vingoe

--

Vice-Chair

 

Submissions By:

Keir D. Wilmut Ruby Egit, Student-at-law

--

For Staff of the Commission

 

 

No submissions were received on behalf of Aouad Choufi

REASONS AND DECISION

I. STAFF'S REQUEST

[1] This was an uncontested written hearing before the Ontario Securities Commission (the "Commission") to determine whether it is in the public interest to make an order imposing sanctions against Aouad Choufi ("Choufi") pursuant to the authority found in subsections 127(1) and (10) of the Securities Act, RSO 1990, c S.5 (the "Act").

[2] Choufi entered into a Settlement Agreement and Undertaking (the "Agreement") with the Alberta Securities Commission (the "ASC") and admitted that he:

a. breached subsection 147(3) of the Alberta Securities Act, RSA 2000, c S-4 (the "ASA") by purchasing shares of Artek Exploration Ltd. ("Artek"), while in a special relationship with it, and with knowledge of a material fact with respect to Artek that had not been generally disclosed;

b. breached subsection 147(4) of the ASA by informing another person, while in a special relationship with Artek, of a material fact with respect to Artek that had not been generally disclosed; and

c. acted contrary to the public interest.

[3] Enforcement Staff of the Commission ("Staff") have requested that the Commission consider imposing a protective order in the public interest under the Act as a result of the Alberta proceeding and agreed facts set out in the Agreement. To adequately protect the capital markets in Ontario, Staff seeks to impose terms similar to the sanctions imposed by the ASC, to the extent possible under the Act. Accordingly, Staff requests that the Commission order, pursuant to subsection 127(1) of the Act, that:

(a) trading in any securities or derivatives by Choufi cease until February 10, 2022, pursuant to paragraph 2 of subsection 127(1) of the Act, except that he may:

i. trade in and/or purchase securities or derivatives through a registrant who has been given a copy of the Settlement Agreement, and a copy of the Order of the Commission in this proceeding, if granted, using one Registered Retirement Savings Plan account, one Registered Education Savings Plan, and one Locked in Retirement Account;

ii. participate in Kelt Exploration Ltd.'s ("Kelt") Incentive Stock Option Plan and Restricted Share Unit Plan; and

iii. purchase securities in an issuer whose securities are not distributed to the public.

[4] In seeking the order, Staff relies upon paragraph 5 of subsection 127(10) of the Act, which provides that an order under subsection 127(1) may be made in respect of a person or company that has agreed with a securities regulatory authority in any jurisdiction to be made subject to sanctions, conditions, restrictions or requirements.

[5] For the reasons set out below, I find that by entering into the Agreement with the ASC, Choufi agreed with a securities regulatory authority to be made subject to sanctions, conditions, restrictions or requirements thereby meeting the threshold criteria set out in paragraph 5 of subsection 127(10) of the Act and that it is in the public interest to make the order requested by Staff under subsection 127(1).

II. PRELIMINARY MATTERS

[6] The Commission issued a Notice of Hearing dated June 2, 2016 in relation to a Statement of Allegations dated June 1, 2016.

[7] At the first appearance on June 20, 2016, Staff of the Commission brought an application to convert the matter to a written hearing, as permitted by the Commission's Rules of Procedure, (2014), 37 OSCB 4168. I heard submissions from Staff on the application to proceed in writing. Choufi did not appear at the first appearance. However, Choufi did provide an email to Staff stating "I take no position" and "Keep me up to date. Thank you."{1} As there was no objection to proceeding by way of a written hearing, I granted the application to proceed in writing and I ordered that Staff deliver its written materials by June 30, 2016, and that Choufi deliver his responding materials, if any, by July 28, 2016.

[8] Staff served and filed its materials as required. Those materials included Written Submissions, a Brief of Authorities and a Hearing Brief that included the Agreement.{2} Choufi did not deliver any responding materials and did not otherwise respond.

[9] The tribunal may proceed in the absence of a party where that party has been given notice of the hearing (Subsection 7(2), Statutory Powers Procedure Act, RSO 1990, c S.22 (the "SPPA")). The affidavits of service{3} filed in this proceeding establish that Choufi has been served and provided with the Notice of the Hearing, Statement of Allegations, disclosure, the Commission's order dated June 20, 2016 converting this matter to a written hearing, Staff's Written Submissions, Brief of Authorities and Hearing Brief. I am satisfied Choufi was properly served and had notice of the written hearing and that the matter may proceed in the absence of Choufi's participation in accordance with the SPPA.

III. THE LAW

[10] The Act provides for inter-jurisdictional enforcement where a person or company has agreed with a securities regulatory authority in any jurisdiction to be made subject to sanctions, conditions, restrictions or requirements (s. 127(10)5 of the Act). On receiving evidence of the fact that such an agreement has been entered into by a respondent, the Commission must determine whether an order under subsection 127(1) of the Act should be made.

[11] Subsection 127(1) empowers the Commission to make orders where, in its opinion, it is in the public interest to do so. In making this determination, the Commission has regard to the purposes of the Act, which are to provide protection to investors from unfair, improper and fraudulent practices, and to foster fair and efficient capital markets and confidence in capital markets (s. 1.1 of the Act).

[12] The purpose of orders under subsection 127(1) of the Act is "protective and prospective" and such orders are made to restrain potential conduct which could be detrimental to the public interest in fair and efficient capital markets (Committee for Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), [2001] 2 SCR 132 ("Asbestos") at para 43 cited in Re JV Raleigh Superior Holdings Inc. (2013), 36 OSCB 4639 ("JV Raleigh") at para 17).

IV. EVIDENCE AND ANALYSIS

A. THE ASC AGREEMENT

[13] Paragraph 3 of the Agreement states that:

Solely for securities regulatory purposes in Alberta and elsewhere in Canada, and as the basis for the settlement and undertakings referred to in paragraph 25, Choufi agrees to the facts and consequences set out in this Agreement.

[Emphasis added]

[14] By entering the Agreement with the ASC, Choufi agreed with a securities regulatory authority to be made subject to sanctions, conditions, restrictions or requirements, thereby meeting the threshold criteria set out in paragraph 5 of subsection 127(10) of the Act. The Agreement, as approved by the ASC, stands as a determination of fact for the purpose of this Commission's consideration of an application for an inter-jurisdictional order.

[15] The following is a summary of the facts agreed to by Choufi:

• Choufi is a Calgary, Alberta resident. At all material times, he was employed as an Exploitation Engineer at Kelt, which is a publicly traded oil and gas producing company whose shares are listed on the Toronto Stock Exchange ("TSX").

• Artek, as of February 2015, was a publicly traded oil and gas producing company with shares listed for trading on the TSX.

• On Monday, February 23, 2015, at 7:00 a.m. EST (the "February 23 Announcement") Kelt announced that Artek had entered into an arrangement with Kelt pursuant to which Kelt had agreed to acquire all of the issued and outstanding common shares of Artek. The transaction was completed on April 16, 2015 and Artek was delisted from the TSX on April 21, 2015.

• On January 28, 2015, the President and CEO of Kelt met with the President and CEO of Artek, and Kelt asked if Artek would consider being acquired by Kelt.

• On February 9, 2015, mutual confidentiality agreements were circulated between the two companies. That same day, the Kelt Board of Directors implemented an immediate blackout -- prohibiting trading in Artek by all individuals at Kelt with knowledge of the proposed transaction.

• On February 11, 2015, a non-binding letter of intent regarding the proposed transaction was delivered by Kelt to Artek.

• On February 12, 2015, Choufi was made aware of the negotiations and possible transaction between Artek and Kelt.

• On February 19, 2015, Choufi provided an overview of Artek's petroleum and natural gas reserves to an independent committee formed at Kelt to consider the proposed transaction.

• The Investment Industry Regulatory Organization of Canada ("IIROC") was alerted to an unusual upwards price movement and an increase in the trading volume of Artek shares prior to the February 23 Announcement. IIROC referred the matter to the ASC for investigation.

• At or around the time of the referral, IIROC received a "Gatekeeper Report" from a member firm's trading surveillance department (the "Reporting Dealer"). The Reporting Dealer's Gatekeeper Report related to suspicious purchases of Artek shares by its customer, Choufi, on February 19 and February 20, 2015.

• Choufi admits that as at February 19, 2015:

• he was in a special relationship with Artek due to his position at Kelt and his knowledge of the negotiations and possible transaction;

• he knew that the possible transaction had not been generally disclosed; and

• he knew that the possible transaction was a material fact with respect to Artek.

• On February 19 and 20, 2015, and with this knowledge, Choufi:

• purchased 26,823 shares of Artek in his direct investment accounts at the Reporting Dealer at an average price per share of $1.695; and

• purchased 25,700 Artek shares for the benefit of and through the account of another person, at a cost of approximately $42,531.

• At market close on February 23, 2015, one full day of trading following the February 23 Announcement, and using a closing price for Artek of $2.61, a profit before commission of $24,496 would have resulted from the sale of the Artek shares in Choufi's account, and a profit of $24,546 from the sale of Artek shares in the other person's account.

• Choufi admits that in addition to his own trading in Artek shares, he also informed an acquaintance of his in Edmonton (the "Tippee") of the negotiations and possible transaction prior to the February 23 Announcement. Choufi was unaware at the time, but is advised and has no reason to dispute that the Tippee purchased 41,500 shares of Artek through a numbered company on February 20, 2015, at a cost of approximately $70,000. These shares were sold days later on February 23 and 25, 2015, for a profit before commissions of $39,868.

[16] Based on the facts set out above, Choufi admitted to breaching subsections 147(3) and (4) of the ASA and acted contrary to the public interest.

B. APPROPRIATE SANCTIONS IN THIS CASE

[17] Having found that the threshold has been met under subsection 127(10)5 of the Act, I must now determine what sanctions, if any, should be ordered against Choufi.

[18] Subsection 127(10) of the Act does not itself empower the Commission to make an order; rather, it provides a basis for an order under subsection 127(1). The Commission must still consider whether it is in the public interest to make an order under subsection 127(1), and if so, what the order ought to be.

[19] The purpose of section 127 of the Act, and the principles that should "animate" its application, were reviewed by the Supreme Court of Canada in Asbestos. The Supreme Court found that when considering whether to make a public interest order, the Commission shall have regard to the purposes of the Act set out in section 1.1 to provide protection to investors from unfair, improper or fraudulent practices; and to foster fair and efficient capital markets and confidence in capital markets (Asbestos, supra at para 41). Further, the Supreme Court stated that the purpose of section 127 is "neither remedial nor punitive; it is protective and preventive, intended to be exercised to prevent likely future harm to Ontario's capital markets" (Asbestos, supra at para 42).

[20] While the Commission must make its own determination of what is in the public interest, it is also important that the Commission be aware of and responsive to an interconnected, inter-provincial securities industry. Comity requires that there not be barriers to recognizing and reciprocating the order of other regulatory authorities when the findings of the other jurisdiction qualify under subsection 127(10) of the Act. For comity to be effective and the public interest to be protected, the threshold for reciprocity must be low (JV Raleigh, supra at paras 21-26; New Futures Trading International Corp. (2013), 36 OSCB 5713 at paras 22-27; and McLean v British Columbia (Securities Commission), [2013] 3 SCR 895 at paras 54 and 69). Further, paragraph 5 of section 2.1 of the Act recognizes the importance of inter-jurisdictional cooperation and states:

The integration of capital markets is supported and promoted by the sound and responsible harmonization and co-ordination of securities regulation regimes.

[21] Based on Choufi's admissions in the Agreement, the nature of the misconduct engaged in and taking into account the importance of inter-jurisdictional cooperation among securities regulatory authorities in Canada, I conclude that an order ought to be made in the public interest pursuant to the authority provided in subsection 127(1) of the Act. Staff's requested order is appropriate for the following reasons:

• Choufi admitted to breaching Alberta securities law and he acknowledges and agrees in the Agreement that the facts and consequences set out in the Agreement are for securities regulatory purposes in Alberta and elsewhere in Canada;

• the terms of the proposed order align with the sanctions imposed in the Agreement to the extent possible under the Act;

• the sanctions sought by Staff are prospective in nature, and would impact Choufi only if he attempted to participate in the capital markets of Ontario; and

• Choufi has not provided the Commission with any information that would persuade the Commission that Staff's requested order is not appropriate in the circumstances.

V. ORDER

[22] Having found that it is in the public interest to do so, I will issue the following order:

1. trading in any securities or derivatives by Choufi shall cease until February 10, 2022, pursuant to paragraph 2 of subsection 127(1) of the Act, except that he may:

i. trade in and/or purchase securities or derivatives through a registrant who has been given a copy of the Settlement Agreement, and a copy of the Order of the Commission in this proceeding, using one Registered Retirement Savings Plan account, one Registered Education Savings Plan, and one Locked in Retirement Account;

ii. participate in Kelt Exploration Ltd.'s Incentive Stock Option Plan and Restricted Share Unit Plan; and

iii. purchase securities in an issuer whose securities are not distributed to the public.

Dated at Toronto this 19th day of August, 2016.

"D. Grant Vingoe"

{1} The Affidavit of Service of Lee Cran, Sworn June 15, 2016 was marked as Exhibit 1 at the first appearance and contained at Tab 3 the email of Choufi dated June 3, 2016.

{2} The Hearing Brief of Staff of the Ontario Securities Commission is marked as Exhibit 2 for the record of this written hearing.

{3} The Affidavit of Service of Lee Cran, Sworn June 23, 2016 is marked as Exhibit 3 for the record of this written hearing.