Oral Ruling and Reasons: In the Matter of Kwok-On Aloysius Lo

 

HEARING:	Thursday, March 5, 2009
PANEL:	Lawrence E. Ritchie	-	Vice Chair and Chair of the Panel
	Carol S. Perry	-	Commissioner
APPEARANCES:	Jane Waechter	-	for Staff of the Ontario Securities Commission
	John Ormston	-	for Kwok-On Aloysius Lo

ORAL RULING AND REASONS

 

The following text has been prepared for the purpose of publication in the Ontario Securities Commission Bulletin and is based on excerpts of the transcript of the hearing. The excerpts have been edited and supplemented and the text has been approved by the Chair of the Panel for the purpose of providing a public record of the decision.

Chair:

[1] This was a hearing under sections 127 and 127.1 of the Securities Act, R.S.O. 1990, c. S.5, as amended, (the “Act”) for the Ontario Securities Commission (the “Commission”) to consider whether it is in the public interest to approve a proposed Settlement Agreement between Staff of the Commission (“Staff”) and the respondent Kwok-On Aloysius Lo (“Lo”).

[2] We have read Staff’s written submissions, and heard the oral submissions and we, as a Panel, have decided to approve the Settlement Agreement as being in the public interest. These are our oral reasons in this matter which will be published in the Bulletin.

[3] The facts and circumstances agreed to by Staff and Lo are set out in the Settlement Agreement. These facts are not findings of fact by this Panel, rather, they are facts agreed to by Staff and Lo for purposes of this settlement. In approving the Settlement Agreement, we relied on the facts in the agreement and those facts represented to us at the hearing today. We have not considered any facts other than those to which the parties have agreed, as is the ordinary and usual practice in these matters (see: Re Rankin (2008), 31 O.S.C.B. 3303 at para. 5).

[4] Lo is a resident of Ontario. He has never been registered in any capacity under the Act.

[5] The Settlement Agreement addresses two issues that emanate from Lo’s conduct:

 

(a) Lo’s trading activity that contributed to a misleading appearance as to the trading activity and price in 8 listed securities; and

(b) Lo’s conduct in relation to the accounts of two individuals was such that he should have been registered under the Act.

[6] In the 5 month period May 1, 2006 to September 30, 2006, Lo executed trades in a manner that repeatedly invoked the minimum guarantee fill (“MGF”) facility of the TSX for the shares of 8 listed stocks and resulted in trades at artificial prices.

[7] Through ninety trades of this nature (“MGF Trades”), Lo generated a profit of $12,086.00 among the accounts described below.

[8] In carrying out the MGF trades, Lo executed 5 wash trades which involved no change in beneficial ownership of the shares.

[9] In carrying out the MGF Trades, Lo traded in his own discount brokerage account and in the discount brokerage accounts of two other individuals. One of the effects of the MGF Trades was a transfer of economic wealth from the accounts of the two individuals to Lo’s account in the amount of $6,555.00.

[10] The two individual account holders were not sophisticated investors. They authorized Lo to select and implement a trading strategy for their accounts and had knowledge of the trading in their accounts by Lo. To execute trades, Lo accessed the two individuals’ accounts online, after he requested and received their account numbers and passwords. Lo ought to have been registered under the Act to carry out this trading activity. According to brokerage firm records, Lo did not have trading authority in the accounts of the two individuals.

[11] A fact that was agreed upon by the parties at the hearing in response to our question is that Lo is 32 years old and is employed in the IT industry, an industry outside of the financial sector. This is a relevant fact to us in coming to our decision.

[12] By agreeing to the Settlement Agreement, Lo admits that by engaging in the conduct described above, he breached Ontario securities law by contravening section 25 and subsection 126.1(a) of the Act. These are very serious violations.

[13] Also, by entering into the Settlement Agreement, Lo has recognized the seriousness of his misconduct and admits that he engaged in conduct that was contrary to the public interest. Lo has accepted sanctions, including a prohibition from becoming a registrant under Ontario securities law for 10 years, a 5 year cease trade order with an RRSP carve out, removal of other exemptions, a disgorgement order and an order to pay the Commission’s costs of the investigation.

[14] Before we go to our order, we would like to briefly refer to the law as it applies to the consideration of the Settlement Agreement before the Panel.

[15] The Commission’s mandate in upholding the purposes of the Act, as set out in section 1.1 of the Act, is:

(a) to provide protection to investors from unfair, improper or fraudulent practices; and

(b) to foster fair and efficient capital markets and confidence in the capital markets.

[16] Further, in accordance with paragraph 2.1(2)(ii) of the Act, the Commission is guided by certain fundamental principles in pursuing the purposes of the Act, including “restrictions on fraudulent and unfair market practices and procedures”.

[17] The role of the Commission in exercising its public interest jurisdiction is set out in Re Mithras Management Ltd. (1990), 13 O.S.C.B. at 1600. Our role here is not to penalize. Instead:

…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 [now 122]. (Re Mithras Management Ltd., supra at 1610-1611)

[18] We are guided by the sanctioning factors listed in Re M.C.J.C. Holdings and Michael Cowpland (2002), 25 O.S.C.B. 1133 and Re Belteco Holdings Inc. (1998), 21 O.S.C.B. 7743, which Staff referred to in their written submissions:

(a) the seriousness of the allegations;

(b) the respondent’s experience in the marketplace;

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

(d) whether or not there has been a recognition of the seriousness of the improprieties;

(e) the restraint of future conduct that is likely to be prejudicial to the public interest (with reference to past conduct);

(f) any mitigating factors; and

(g) the remorse of the respondent.

[19] In addition, appropriate sanctions need to take into account the specific circumstances of each case (Re M.C.J.C. Holdings and Michael Cowpland, supra at 1134-1135).

[20] With regards to trading activity and investor expectations, this Commission has stated that:

Investors have a right to expect that, in a regulated market, the quotes, prices and trading volumes in the market are true and proper and not manipulated. (Re Robinson (1996), 19 O.S.C.B. 2643 at para. 277)

[21] As this Commission affirmed in Re Delage (2009), 32 O.S.C.B. 1240, investor confidence in the validity of the trading activity conducted in the marketplace is critical to the maintenance of efficient capital markets:

Investors must have confidence that they can trade in a marketplace in which the available information properly reflects genuine trading activity. Investors in the capital market base their behaviour and their investment decisions on posted trading prices. They are entitled to assume that the posted prices reflect bona fide transactions in a market operating free of improper influence. Their own transactions are then reflected in subsequent prices. If any investor makes an investment decision in reliance on a posted price that does not reflect genuine trading activity, that investor may be harmed. Subsequent transactions could also be materially affected by that single instance of a misleading posted price. The result could be harm to investors generally and the undermining of investor confidence in the marketplace. (Re Podorieszach [2004] A.S.C.D. No. 360 at para. 87 as quoted in Re Delage, supra at para. 33)

[22] Section 25 of the Act requires persons who trade in securities to be registered (subject to certain specific exceptions). As this Commission has stated in Re Hew (2005), 28 O.S.C.B. 6223 at para. 15 and other decisions, “Registration is meant to protect the public”. As we said in Re Michalik (2007), 30 O.S.C.B. 6717 at para. 48, persons who engage in activities requiring registration, whether trading and/or advising, “have a very important function in the capital markets and they are also in a position where they may potentially harm the public”. This is why regulating the conduct of registrants is a matter of public interest (see Michalik). For this reason, the requirement to be registered, and the granting of registration is an essential exercise for market and public protection. As we have said previously, “[r]egistration is a privilege that is granted to individuals and entities that have demonstrated suitability... no person has a right to be registered” (Re Istanbul (2008), 31 O.S.C.B. 3799 at para. 60). Correspondingly, no person has the right to engage in activities that require registration, without being registered.

[23] In Re Sohan Singh Koonar et al. (2002), 25 O.S.C.B. 2691, this Commission held that the role of a Commission Panel in reviewing a settlement agreement is not to substitute its own sanctions for what is proposed in the settlement agreement. Instead, the Commission should ensure that the agreed sanctions in the settlement agreement are within acceptable parameters.

[24] This is what we as a Panel have done in approving this Settlement Agreement. We are of the view that the sanctions set out in the Settlement Agreement are within the acceptable parameters.

[25] We find that together, all the sanctions imposed in this matter provide adequate specific and general deterrence, which the Supreme Court of Canada has established is an important regulatory objective for securities commissions (Re Cartaway Resources Corp., [2004] 1 S.C.R. 672). The sanctions: (i) reflect an appropriate outcome for Lo and deter any future misconduct of this nature; (ii) encourage responsible trading practices in accordance with Ontario securities law; and (iii) contribute to the fair and efficient operation of the capital markets.

[26] This came before us as a settlement at first instance. Staff’s Statement of Allegations accompanied a Notice of Hearing for approval of this settlement. This is a relevant factor for us and is reflected in the negotiated proposal that has been put to us for approval. There is great benefit achieved in negotiated settlements. We note that this was not a hearing on the merits. There is no certainty as to the outcome in contested hearings, and certainty in these matters is desirable for the public, as well as for the parties to the agreement. As was noted recently by this Commission in Re Biovail Corp. (2009), 32 O.S.C.B. 1979, which was a hearing to consider the approval of a settlement agreement between Staff and Brian H. Crombie, “[i]n addition, consideration should be given to the agreement reached between adversarial parties, as a balancing of factors and interests, has taken place between [these adversarial parties]” (Re Biovail, supra, at para. 21).

[27] We also note that Lo’s cooperation with Staff is noted in the Settlement Agreement and that by settling, Commission resources have been conserved. As stated above, we are of the view that the Respondent’s conduct in this matter is very serious, and that sanctions for such conduct must be assessed in the context of the mitigating factors discussed above. We have done so, and therefore, we find that the agreed upon sanctions are acceptable and fall within acceptable parameters.

[28] Therefore, we approve the Settlement Agreement as being in the public interest, and we order that:

(a) the settlement agreement is approved;

(b) the Respondent is prohibited from becoming a registrant under Ontario securities law for a period of 10 years commencing on the date of the Commission’s order;

(c) the Respondent is prohibited from trading or acquiring securities for a period of 5 years commencing on the date of the Commission’s order, subject to the exception that the Respondent will be permitted to trade in one RRSP account in his own name (which he will identify in writing to the Staff of the Commission), provided that the trades in the RRSP account are limited to trades in mutual fund units, guaranteed investment certificates, treasury bills, debt instruments that cannot be converted (directly or indirectly) into shares or securities listed on the Toronto Stock Exchange or New York Stock Exchange;

(d) the exemptions contained in Ontario securities law do not apply to the Respondent for a period of 5 years commencing on the date of the Commission’s order;

(e) the Respondent pay disgorgement of $18,641.00, to be allocated to or for the benefit of third parties under s. 3.4(2)(b) of the Act; and

(f) the Respondent pay the Commission’s costs of the investigation in the amount of $5,000.00.

Approved by the Chair of the Panel on March 27, 2009.