On January 7, 2008, a Hearing Panel of the Pacific Regional Council of the Mutual Fund Dealers Association of Canada ("MFDA") (the "Hearing Panel") released its Decision and Reasons in connection with the settlement hearing held on December 13, 2007 regarding Berkshire Investment Group Inc. ("Berkshire"). The Hearing Panel approved a settlement agreement (the "Settlement Agreement") entered into between the MFDA and Berkshire which resolved allegations concerning Berkshire's failure to conduct reasonable supervisory investigations in response to reports it received from two individuals concerning the activities of one of its mutual fund salespersons, Ian Gregory Thow ("Thow").
Thow was an Approved Person and a Senior Vice-President of Berkshire located in Victoria, B.C. Thow was alleged to have carried out a multi-million dollar fraud between January 2003 and May 2005 whereby he persuaded more than forty individuals, including clients of Berkshire, to provide him with money (at least $18 million) which he promised to invest on their behalf in what turned out to be bogus investments, including construction loans and shares of a Jamaican bank. Instead, Thow used the money for his own personal benefit. In October 2007, a panel of the British Columbia Securities Commission found that Thow had failed to deal fairly, honestly and in good faith with his clients, perpetrated a fraud, made misrepresentations and traded in securities without being registered: (see British Columbia Securities Commission v. Thow et al, 2007 BCSECCOM 627 (BCSC)).
Although Thow had actively concealed his misconduct from Berkshire and it was not aware of his fraudulent activities, Berkshire acknowledged in the Settlement Agreement that it did not take reasonable supervisory and disciplinary measures after it received reports from the two individuals regarding Thow's activities. Berkshire acknowledged that reasonable supervisory investigations in response to the reports it received concerning Thow's business dealings would have included, among other things, obtaining written confirmation and documentary corroboration of the description of the events received from those individuals, and from Thow concerning his business dealings with those individuals. Berkshire further acknowledged that, had it taken those measures, it is more likely that Thow's activities would have been discovered and brought to an end.
The Hearing Panel accepted that Berkshire's failure to conduct reasonable supervisory investigations in response to the two reports was not the result of a systematic failure on its part to maintain and adhere to appropriate supervisory policies and procedures or the result of any intentional non-compliance on the part of Berkshire.
Under the terms of the Settlement Agreement, the Hearing Panel imposed a fine in the amount of $500,000 on Berkshire and required Berkshire to pay $50,000 in respect of the MFDA's costs of its investigation and the hearing. The penalty set forth in the Settlement Agreement is at the higher end of the reasonable range when compared with recent decisions of securities regulators involving supervision deficiencies that may have facilitated the continuation of serious misconduct by an advisor: (see Re IQON Financial Inc., MFDA Case #200713 (May 24, 2007); Re Canaccord Capital Corporation, IDA Pacific District Council (November 23, 2006); and Re National Bank Financial Inc., IDA Quebec District Council (August 29, 2007)).
In coming to its conclusions regarding the Settlement Agreement, the Hearing Panel considered and applied the factors referred to in Re IQON Financial Inc., which include, among other things, the public interest and whether the penalty imposed will protect investors, whether the Settlement Agreement was reasonable and proportionate, and whether the Settlement Agreement will foster confidence in the integrity of the Canadian capital markets, the MFDA and the regulatory process itself.
The Hearing Panel also applied the MFDA Penalty Guidelines to the Settlement Agreement and took into account various mitigating factors in determining whether the proposed penalty was appropriate, which included the fact that Berkshire was not aware of, and had not authorized, Thow's misconduct; it did not benefit from any of Thow's improper conduct; it compensated 29 of its clients who provided monies to Thow personally during his period of registration as an Approved Person of Berkshire; it had not been the subject of previous MFDA disciplinary proceedings; it had cooperated with MFDA staff throughout the investigation into its conduct; its admissions described in the Settlement Agreement reflected an acceptance of responsibility for its misconduct; and that by entering into a Settlement Agreement, Berkshire had avoided the necessity of the MFDA conducting a lengthy hearing.
OSC Decision: AiT Advanced Information Technologies Corporation, Bernard Jude Ashe And Deborah Weinstein
On January 14, 2008, the Ontario Securities Commission (the "Commission") released its decision in AiT Advanced Information Technologies Corporation, Bernard Jude Ashe and Deborah Weinstein. Staff alleged that AiT Advanced Information Technologies Corporation ("AiT") had breached section 75 of the Ontario Securities Act (the "Act") and engaged in conduct contrary to the public interest by failing to disclose a merger transaction between it and 3M Company ("3M") and that Bernard Jude Ashe ("Ashe") and Deborah Weinstein ("Weinstein") committed an offence pursuant to section 122(3) of the Act and engaged in conduct contrary to the public interest by authorizing, permitting or acquiescing in AiT's failure to disclose the merger transaction as a material change.
As both AiT and Ashe had entered into settlement agreements with Staff which were approved by the Commission, the hearing dealt with only those allegations against Weinstein.
The Commission reviewed the meaning of "materiality" under the Act and confirmed the test as espoused in Re YBM Magnex et al.: "The test for materiality in the Act is objective and is one of market impact. An investor wants to know facts that would reasonably be expected to significantly affect the market price or value of securities." The Commission also referred to the decision of the British Columbia Securities Commission (the "BCSC") in Re Siddiqi which held that, in the circumstances of a transaction, it is necessary to look beyond the materiality of the transaction itself. The BCSC noted that in some circumstances the existence of negotiations could reasonably be expected to affect the stock price and would therefore be material. After determining that the negotiations between AiT and 3M were material in relation to AiT as a reporting issuer, the Commission considered the difference between material change and material fact in aid of its consideration of whether the negotiations constituted a material change.
In considering the distinction between material fact and material change, the Commission relied on expert reports and testimony adduced during the hearing. One such report noted that, in distinguishing material fact from material change, the Act recognized the need of issuers to keep developing transactions confidential during the course of negotiations. As such, although a negotiation may be material from an early stage and, for the purpose of insider trading laws, prohibit an individual from trading on "material facts", this may occur well before the negotiations have reached a point of a commitment that can be characterized as a change in the issuer's business, operations or capital and therefore a material change requiring public disclosure.
The Commission emphasized that there could be no "bright-line test" to determine whether a material change has occurred; rather that determination will depend on the circumstances and series of events occurring during the course of negotiations. It was not sufficient that the Board of Directors of AiT had agreed to pursue the potential transaction since putting the transaction into effect was not within the AiT Board's control. A board decision to proceed "would not ordinarily be a material change in the business, operations or capital of an issuer at that point in time unless the board has reason to believe that the other party is also committed to completing the transaction ..." Conversely, a signed, definitive agreement is not a prerequisite for finding that a material change has occurred. Rather, a material change will often have occurred at the point of a clear commitment by both parties to complete the transaction and/or when the parties can reasonably conclude that there is a substantial likelihood that the transaction will be completed.
Under this analytical framework, the Commission concluded that there was no material change in the business, operations or capital of AiT during the period in question, and as such the allegations against Weinstein were dismissed.
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