Decision on Sanctions and Reasons: In the Matter of Edward Joseph Allen et al.

IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED  

- and -

JOSEPH EDWARD ALLEN, ABEL DA SILVA,
CHATERAM RAMDHANI, AND SYED KABIR   

DECISION ON SANCTIONS AND REASONS  

DECISION ON SANCTIONS AND REASONS

I. Background

[1] This was a bifurcated hearing in which it was first determined that the Respondents Joseph Edward Allen (“Allen”), Abel da Silva (“Da Silva”), Chateram Ramdhani (“Ramdhani”) and Syed Kabir ( “Kabir”) violated Ontario securities law, specifically sections 25(1) and 53 and, in the case of Allen, section 36 of the Securities Act, R.S.O. 1990, c. S.5 as amended (the “Act”). It was also determined that all of the Respondents acted in a manner contrary to the public interest (see our Decision and Reasons dated October 12, 2005) and that sanctions under sections 127(1) and 127.1 of the Act should be ordered .

[2] Following the release of that decision we held a separate hearing to consider additional evidence and submissions by Staff and the Respondents relevant to sanctions.

[3] The hearing as to sanctions was held on January 9, 2006 and was attended by Allen, Ramdhani and Da Silva, each in person but without the attendance of Kabir either in person or through counsel. The hearing was first continued on March 9, 2006 and was attended by Ramdhani in person but without the attendance of Allen, da Silva and Kabir either in person or through counsel and finally continued on March 22, 2006 and was attended by Allen and Ramdhani, each in person but without the attendance of Da Silva and Kabir either in person or through counsel.

[4] These are our reasons and decision as to the appropriate sanctions against the Respondents.

[5] In our Decision and Reasons dated October 12, 2005 we found that the Respondents did not comply with Ontario securities law and acted contrary to the public interest. In particular we found that the Respondents:

(i) engaged in trading in securities of Andromeda Media Capital Corporation (“Andromeda”) without appropriate registration, in violation of section 25(1) of the Act, and acted contrary to the public interest; and

(ii) engaged in a distribution of securities of Andromeda to investors who did not qualify as accredited investors and in respect of which no other exemption was available under the Act, in violation of section 53 of the Act, and acted contrary to the public interest.

[6] With respect to Allen we found that he failed to disclose commissions received in connection with his trades in securities of Andromeda, in violation of section 36 of the Act, and acted contrary to the public interest.

III. The Law

[7] As set out in section 1.1 of the Act the Commission’s mandate in upholding the purposes of the Act is:

[8] The Commission’s public interest jurisdiction is neither remedial nor punitive; it is protective and preventive, intended to be exercised to prevent likely future harm to Ontario’s capital markets (see Committee for Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission), [2001] S.C.C. 37 at paras. 41-43).

[9] The principles that guide the Commission in exercising its public interest jurisdiction are reflected in Mithras Management Ltd. (1990), 13 O.S.C.B. 1600 at pp. 1610-1611:

… the role of this Commission is to protect the public interest by removing from the capital markets – wholly or partially, permanently or temporarily, as the circumstances may warrant – those whose conduct in the past leads us to conclude that their conduct in the future may well be detrimental to the integrity of those capital markets. We are not here to punish past conduct; that is the role of the courts, particularly under section 118 of the Act. We are here to restrain, as best we can, future conduct that is likely to be prejudicial to the public interest in having capital markets that are both fair and efficient. In so doing we must, of necessity, look to past conduct as a guide to what we believe a person’s future conduct might reasonably be expected to be; we are not prescient, after all.

[10] When we determine appropriate sanctions the following fundamental factors should be considered:

(i) investor protection as set out in section 1.1(a) of the Act;

(ii) fostering fair and efficient capital markets as set out in section 1.1(b) of the Act;

(iii) maintaining high standards of business conduct as set out in s. 2.1 clause 2(iii) of the Act;

(iv) the protective and preventative mandate of the Commission under the Act; and

(v) the objectives of specific and general deterrence.

[11] Further, sanctions should be determined by taking into account the specific circumstances of each case. As set out in Re Belteco Holdings Inc. (1998), 21 O.S.C.B. 7743 at paras. 25-26, the Commission may consider a number of factors in determining the nature and duration of sanctions including:

(a) the seriousness of the allegations proved;

(b) the respondents’ experience in the marketplace;

(c) the level of a respondent’s activity in the marketplace;

(d) whether there has been a recognition by the respondents of the seriousness of the improprieties;

(e) whether the sanctions imposed may serve to deter not only those involved in the case being considered, but any like-minded people, from engaging in similar abuses of the capital markets; and

(f) any mitigating factors.

[12] Other factors the Commission may consider were established in Re M.C.J.C. Holdings and Michael Cowpland (2002), 25 O.S.C.B. 1133 at p. 1136, and include:

(a) the size of any profit (or loss avoided) from the illegal conduct;

(b) the size of any financial sanction or voluntary payment when considered with other factors;

(c) the effect any sanction might have on the livelihood of the respondent;

(d) the restraint any sanction may have on the ability of the respondent to participate without check in the capital markets;

(e) the reputation and prestige of the respondent; and

(f) the shame or financial pain that any sanction would reasonably cause to the respondent, and the remorse of the respondent.

[13] The Supreme Court of Canada in Re Cartaway Resources Corp., [2004] 1 S.C.R. 672 at paras. 60-70 affirmed that the Commission may properly impose sanctions to deter a respondent in a particular case, and also other like-minded market participants, from engaging in similar abuses of capital markets.

[14] Staff also referred us to some authorities that we should consider when determining the appropriate sanctions against the Respondents in respect of activities involving trading without a prospectus and registration and failure to disclose commissions.

[15] In Re Prydz (2000), 23 O.S.C.B. 910, a decision approving a settlement agreement involving allegations of trading without a prospectus and registration, the respondent, who had previously been registered as a mutual fund dealer, failed to disclose commissions obtained in connection with the sale of highly speculative securities. The sanctions against the respondent included the termination of his registration, an undertaking never to reapply for registration, a cease trade order (“CTO”) for five years and a reprimand.

[16] In Re Delellis et al. (1998), 21 O.S.C.B. 305, the respondent sold limited partnerships without being properly registered and disclosed some but not all commissions and other perquisites received. The Respondent’s registration was terminated and exemptions under securities law (“Exemptions”) were permanently removed.

[17] In Re Marchment & MacKay Limited et al. (1999), 22 O.S.C.B. 4359, the respondents sold speculative penny stocks by telephone without regard to suitability and with intent to induce a hasty decision by the client. The sanctions ordered against them ranged from termination of registration and permanent removal of Exemptions to suspension of the same for five, seven and ten years.

[18] In Re Dodsley (2003), 26 O.S.C.B. 1799, the respondent traded in commodities futures without registration. The Commission ordered that the respondent be subjected to a ten year CTO.

[19] n Re Lett (2004), 27 O.S.C.B. 3215, the respondents were found to be selling “high yield” securities acting as market intermediaries and trading contrary to subsection 25(1)(a) of the Act. The Commission ordered that Lett be subject to a ten-year CTO (with carve-outs), a prohibition from becoming an officer or a director of a reporting issuer for 15 years, a reprimand, and payment of costs.

(1) Joseph Edward Allen

[20] Staff requested that the following sanctions be ordered against Allen:

(a) a permanent CTO;

(b) a permanent removal of Exemptions;

(c) a disgorgement in the amount of $600,624; and

(d) a reprimand.

[21] Staff did not seek an order as to costs. Staff did not provide substantive reasons why they did not seek costs, other than a concern whether the amount to be disgorged from Allen was collectible.

[22] Allen disagreed with Staff’s position regarding appropriate sanctions. Allen submitted that the sanctions proposed by Staff would effectively take away his ability to make a living in the securities industry. Allen also submitted that the consequences of the proceedings have damaged his reputation. Rather, he suggested that the Commission impose the following sanctions against him:

(a) a CTO for ten years, with the exception that he be permitted to trade in securities listed on the TSX and in a retirement savings plan;

(b) removal of Exemptions for ten years;

(c) costs in the amount of $15,000; and

(d) a reprimand.

[23] In determining the appropriate sanctions we considered the fact that Allen was experienced in selling securities, had previously been registered for six years and had been denied a transfer of registration by the Commission in 2001 on the grounds that he was not suitable for registration. He nevertheless went back into the business of selling securities without seeking registration . By virtue of his registration history Allen was clearly aware of the concept of, and requirement for, registration under the Act.

[24] We also noted that Allen’s conduct was referred to in the Re Marchment & MacKay decision cited above. Although Allen was not a respondent in the matter, this decision further establishes Allen's level of experience in the industry (since 1995) and the fact that he should have known he was required to be registered for the activities he conducted.

[25] Staff also brought to our attention a decision of the Alberta Securities Commission (the “ASC”) dated December 7, 2005 in the matter of Re InstaDial Technologies Corp. et al., which involved Allen and Kabir. In that decision the ASC found that in 2004 and 2005, Allen and Kabir were involved in the illegal distribution of the common shares of InstaDial Technologies Corp. via telephone sales to investors in Alberta from the Toronto office of J. Allen Capital. The ASC found that no serious efforts were made by Allen and Kabir to determine whether these investors were qualified as accredited investors and that their efforts made to document the trades as sales to accredited investors were essentially a sham. Allen was sanctioned by way of a CTO and removal of Exemptions for ten years. Allen was also required to pay an administrative penalty of $30,000 and costs.

[26] The level of activity of Allen and his sales force in the marketplace in the matter before us was significant. Allen was the primary person involved in the organization and execution of the sales of Andromeda securities being considered. He put together the sales force which included himself and the other respondents, Ramdhani, Da Silva and Kabir. Through the offering of securities of Andromeda, Allen and his salesmen raised $1,080,000 from 240 investors.

[27] We find as an aggravating factor that Allen intentionally attempted to structure his relationship with Andromeda as an employment contract in order to get around the registration requirements. Although Allen argued that the employment agreement was signed in conjunction with Andromeda's lawyers and not designed to get around the Act, we did not accept his argument. We made a finding at paragraph 80 of our Decision and Reasons dated October 12, 2005 that Allen structured the relationship in an attempt to get around the registration requirements.

[28] Further, we considered the fact that Allen hired others as salespersons and by doing so contributed to their breach of the Act. Allen argued that he hired these persons on the advice of the counsel of Andromeda and that Allen did not think it was improper to do so. There was no evidence that this was the case.

[29] We also considered that Allen did not disclose the amounts of his commissions which were substantial. Allen responded that although he now wished he had disclosed these commissions, doing so would not have altered the investment decision made by the investors.

[30] Rather than showing remorse at the sanctions hearing Allen attempted to further justify his conduct.

[31] Staff also sought an order requiring Allen to disgorge $600,624 to the Commission being the amount obtained as a result of his non-compliance with Ontario securities law.

[32] Subsection 127(1) clause 10 of the Act gives the Commission the following power to order disgorgement to the Commission:

[33] Allen’s role and responsibility in the sales program for the securities of Andromeda was significant. He was the leading mind behind the program and hired salesmen to assist him in selling the securities. Allen was experienced in the industry and knew about the registration requirements. A respondent who has not complied with securities law should not benefit from such non-compliance.

[34] With respect to the size of the "amount" obtained from illegal conduct, we made a finding in our Decision and Reasons dated October 12, 2005, that Allen was paid $600,624 in total fees or commissions by Andromeda pursuant to the Agreement. This approximated 60 percent of the subscription proceeds received.

[35] Allen submitted that he did not make $600,624 in profits because of the very substantial costs of the offering and the 20 percent commissions paid to the salespersons. It seems to be Allen’s submission that any order to disgorge amounts obtained should have regard only to “net” amounts obtained as opposed to “gross” amounts.

[36] It is Staff’s submission that the wording of the legislation permits the panel to order disgorgement of the gross amount obtained. Further, Staff submitted that the legislation should not be read so as to restrict any disgorgement order to the net amount obtained as to do so would reduce the deterrent effect of the disgorgement sanction.

[37] We agree with Staff’s submission on the interpretation of subsection 127(1) clause 10 of the Act. After considering the specific circumstances in this case we conclude that a disgorgement order is appropriate in this case.

[38] Staff made submissions as to the third parties to whom the disgorged amount should be allocated pursuant to subsection 3.4(2)(b) of the Act once paid to the Commission. After considering these submissions we have decided that it is appropriate to make the order in the form stated below.

(2) Chateram Ramdhani

[39] Staff requested that the following sanctions be ordered against Ramdhani:

(a) a CTO and removal of Exemptions for seven years, and

(b) payment of costs in respect of the investigation in the amount of $7,500.

[40] Ramdhani submitted that he relied on Allen's assurances that Allen had investigated Commission Rule 45-501 "through lawyers" and that Ramdhani was assured that their activities were proper. Ramdhani’s submissions were not supported by any evidence.

[41] Ramdhani also submitted that he has student loans for which he presented a financial statement dated December 31, 2005, and that the costs of $7,500 would be burdensome.

[42] With respect to Ramdhani we find that he benefited from a commission of 20 percent of his sales which is significant.

[43] As stated above at paragraph 26 of these reasons we also find that the whole sales force, including Ramdhani, had a substantial level of activity in the marketplace.

[44] As aggravating factors we note that Ramdhani had been previously registered for one and a half years as a service broker and that he was denied a transfer of registration on suitability grounds, in large part due to his lack of understanding of the "Know your Client and Suitability" provision of Commission Rule 31-505. He nevertheless went back into the business of selling securities. By virtue of his registration history Ramdhani was clearly aware of the concept of, and requirement for, registration under the Act.

(3) Abel Da Silva

[45] Staff requested that the following sanctions be ordered against Da Silva:

(a) a CTO and removal of Exemptions for seven years, and

(b) payment of costs in respect of the investigation in the amount of $7,500.

[46] Da Silva submitted that he is in poor health and has no future intention of working in the securities industry. He also submitted that he is impecunious and would be unable to afford the $7,500 costs.

[47] We considered the evidence that the salesmen, including Da Silva, were paid a commission of 20 percent on their sales which constitutes a substantial rate of compensation.

[48] As stated above at paragraph 26 of these reasons we find that the whole sales force had a substantial level of activity in the marketplace.

[49] As a mitigating factor we note that Da Silva had never previously been registered and had no previous involvement in the marketplace. He may have had no understanding that he should have been registered.

[50] As an aggravating factor we note that Da Silva had a fairly lengthy criminal record, none related to securities crimes, but which would have made Da Silva unsuitable for registration had he applied for it.

(4) Syed Kabir

[51] Staff requested that the following sanctions be ordered against Kabir:

(a) a CTO and removal of Exemptions for seven years, and

(b) payment of costs in respect of the investigation in the amount of $7,500.

[52] With respect to Kabir we find that he benefited from a commission of 20 percent of his sales which is substantial.

[53] As stated above at paragraph 26 of these reasons we also find that the whole sales force, including Kabir, had a substantial level of activity in the marketplace.

[54] As an aggravating factor we note that Kabir was previously registered for eight years and hence was familiar with the concept of, and requirement for, registration. We also note that Kabir continued selling securities in Alberta with Allen (see the InstaDial decision referred to at paragraph 25 above). As a result of this decision, Kabir was sanctioned by the Alberta Securities Commission by way of a CTO and removal of Exemptions for three years. He was also required to pay an administrative penalty of $15,000 and costs.

[55] We consider that it is important in this case to impose sanctions that not only deter the Respondents but also like-minded people from engaging in future conduct that violates securities law. 

[56] For these reasons, we are of the opinion that it is in the public interest to make the following order with respect to sanctions against the Respondents. 

[57] With respect to the respondent Joseph Edward Allen (“Allen”), it is ordered:

(i) the securities are listed and posted for trading on the Toronto Stock Exchange or the New York Stock Exchange (or their successor exchanges) or are issued by a mutual fund which is a reporting issuer;

 

 

(ii) Allen does not own legally or beneficially more than one per cent of the outstanding securities of the class or series of the class in question; and

(iii) Allen must carry out permitted trading through a registered dealer and through accounts opened in his name only and must close any accounts in which he has any legal or beneficial ownership or interest that were not opened in his name only;

(b) that pursuant to s. 127(1), clause 3 of the Act, any exemptions contained in Ontario securities law do not apply to Allen permanently, except for those exemptions necessary to enable Allen to trade in securities as permitted by paragraph 57a of this Order;

(a) that pursuant to s. 127(1), clause 2 of the Act, trading, directly or indirectly, in any securities by Ramdhani, for his own account or for the account of others, cease for a period of seven years, with the exception that Ramdhani be permitted to trade in securities for his own account or for the account of a registered retirement savings plan (as defined in the Income Tax Act (Canada)) in which he has sole legal and beneficial ownership and interest, provided that:

(i) the securities are listed and posted for trading on the Toronto Stock Exchange or the New York Stock Exchange (or their successor exchanges) or are issued by a mutual fund which is a reporting issuer;

(ii) Ramdhani does not own legally or beneficially more than one per cent of the outstanding securities of the class or series of the class in question; and

(iii) Ramdhani must carry out permitted trading through a registered dealer and through accounts opened in his name only and must close any accounts in which he has any legal or beneficial ownership or interest that were not opened in his name only;

(b) that pursuant to s. 127(1), clause 3 of the Act, any exemptions contained in Ontario securities law do not apply to Ramdhani for a period of seven years, except for those exemptions necessary to enable Ramdhani to trade in securities as permitted by paragraph 58a of this Order; and

(ii) Da Silva does not own legally or beneficially more than one per cent of the outstanding securities of the class or series of the class in question; and

(iii) Da Silva must carry out permitted trading through a registered dealer and through accounts opened in his name only and must close any accounts in which he has any legal or beneficial ownership or interest that were not opened in his name only;

(b) that pursuant to s. 127(1), clause 3 of the Act, any exemptions contained in Ontario securities law do not apply to Da Silva for a period of seven years, except for those exemptions necessary to enable Da Silva to trade in securities as permitted by paragraph 59a of this Order; and

(ii) Kabir does not own legally or beneficially more than one per cent of the outstanding securities of the class or series of the class in question; and

(iii) Kabir must carry out permitted trading through a registered dealer and through accounts opened in his name only and must close any accounts in which he has any legal or beneficial ownership or interest that were not opened in his name only;

(b) that pursuant to s. 127(1), clause 3 of the Act, any exemptions contained in Ontario securities law do not apply to Kabir for a period of seven years, except for those exemptions necessary to enable Kabir to trade in securities as permitted by paragraph 60a of this Order; and

DATED AT Toronto this 10th day of May, 2006.