Decision and Reasons: In the Matter of Dino P. Delellis et al.
DINO P. DELELLIS, WILLIAM R. KENNEDY AND
THE HEIGHT OF EXCELLENCE FINANCIAL PLANNING GROUP INC.
Hearing: November 17, 19, 20, December 8, 10, 11, 1997
Panel: J.A. Geller, Q.C. - Acting Chair
J.F. Howard, Q.C. - Commissioner
D. Brown - Commissioner
Counsel: D. J. Ferris ) for Staff of the
N. Shah (Student-at-Law) ) Ontario Securities Commission
W.R. Kennedy - In person
DECISION AND REASONS
Notice of Hearing and Allegations
These proceedings were commenced by Notice of Hearing dated April 9, 1997, in which thestaff ("Staff") of the Commission requested sanctions under clauses 127(1) 1 and 3 of the SecuritiesAct (the "Act") against Dino P. DeLellis ("DeLellis") and under clause 127(1) 3 of the Act againstWilliam R. Kennedy ("Kennedy"), as well as relief under various clauses of subsection 127(1) of theAct against The Height of Excellence Financial Planning Group Inc. ("THE"). Staff's proceedingsagainst THE were settled by a settlement agreement approved by a panel of the Commission onAugust 15, 1997.
The relief was sought on the basis of the following allegations, made by Staff in its Statementof Allegations attached to the Notice of Hearing:
"Staff of the Enforcement Branch of the Ontario Securities Commission ("Staff")make the following allegations:
BACKGROUND
1. Dino P. DeLellis ("DeLellis") is registered with the Ontario SecuritiesCommission (the "Commission"), subject to terms and conditions, to sellmutual fund securities and limited market products.
2. DeLellis sold units in Middlesex Perth Bovine I Limited Partnership,Middlesex Perth Bovine II Limited Partnership, Middlesex Perth Bovine IIILimited Partnership, Middlesex Perth Bovine IV Limited Partnership,Middlesex Perth Bovine V Limited Partnership and Middlesex Perth BovineVI Limited Partnership (the "Bovine Limited Partnership") to his clients from1992 to 1995 inclusive.
3. William R. Kennedy ("Kennedy") was formerly registered with theCommission as the president of Piemontese London Ltd. Kennedy was alsothe director of the six companies incorporated to be the general partners forthe six Bovine Limited Partnerships.
4. Piemontese London Ltd. was registered with the Commission as a limitedmarket dealer (conditional) before the registration of Piemontese London Ltd.was terminated on September 24, 1996. Piemontese London Ltd. was theagent for the sale of five of the six Bovine Limited Partnerships.
5. Middlesex Perth Bovine I Limited Partnerships was a limited partnership ofwhich units were offered by way of offering memorandum dated June 10,1992. Middlesex Perth Bovine I Limited Partnership was dissolved on orabout February 15, 1994 and its assets transferred to Middlesex Perth BovineI Inc.
6. Middlesex Perth Bovine II Limited Partnership was a limited partnership ofwhich units were offered by way of offering memorandum dated October 1,1992. Middlesex Perth Bovine II Limited Partnership was dissolved on orabout March 10, 1994 and its assets transferred to Middlesex Perth BovineII inc.
7. Middlesex Perth Bovine III Limited Partnership was a limited partnership ofwhich units were offered by way of memorandum dated February 11, 1993.Middlesex Perth Bovine III Limited Partnership was dissolved on or aboutMarch 10, 1994 and its assets transferred to Middlesex Perth Bovine III Inc.
8. Middlesex Perth Bovine IV Limited Partnership was a limited partnership ofwhich units were offered by way of offering memorandum dated May 17,1993. Middlesex Perth Bovine IV Limited Partnership was dissolved and itsassets transferred to Middlesex Perth Bovine IV Inc.
9. Middlesex Perth Bovine V Limited partnership was a limited partnership ofwhich units were offered by way of offering memorandum dated December1, 1993. Middlesex Perth Bovine V Limited Partnership was dissolved andits assets transferred to Middlesex Perth Bovine V Inc.
10. Middlesex Perth Bovine VI Limited Partnerships was a limited partnership ofwhich units were offered by way of offering memorandum dated March 31,1994. Middlesex Perth Bovine VI Limited Partnership was dissolved and itsassets transferred to Middlesex Perth Bovine VI Inc.
11. On April 26, 1996, Middlesex Perth Bovine I Inc., Middlesex Perth BovineII Inc., Middlesex Perth Bovine III Inc., Middlesex Perth Bovine IV Inc.,Middlesex Perth Bovine V Inc. and Middlesex Perth Bovine VI Inc. wereamalgamated under the laws of Ontario to form Aosta Piedmontese Limited.
12. The Height of Excellence Financial Planning Group Inc. ("FPG") is registeredwith the Commission as a mutual fund dealer and a limited market dealer.FPG has been DeLellis' employer and sponsor since February 29, 1996.
BOVINE LIMITED PARTNERSHIPS
13. From 1992 to 1995, in connection with the sale of units in Bovine LimitedPartnerships, DeLellis received approximately $280,000 in marketingcommissions which were not disclosed to his clients or to his then employer,AIC Investment Planning Limited ("AIC") a registered dealer. Thesemarketing commissions were in addition to the commission provided for in theoffering memoranda.
14. DeLellis received undisclosed benefits from the Bovine Limited Partnerships,including but not limited to, trips to Houston and Florida, cash payments, anall-terrain vehicle, a Jacuzzi tub, cellular phone accessibility, and a job and abonus for his brother. Kennedy also received undisclosed benefits from theBovine Limited Partnerships.
15. The Form 20 forms filed with the Commission did not disclose thecommissions or other benefits received by DeLellis and Kennedy in respect ofthe sale of units in the Bovine Limited Partnerships. The Form 20 forms didnot disclose any commissions paid to AIC or DeLellis.
16. The marketing commissions and benefits received by DeLellis were notpermitted under the seed capital exemptions set out in sections 35(1)21 and72(1)(p) of the Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act:),as claimed in the Form 20 forms. As a result, the exemptions were notavailable and the sale of units in the Bovine Limited Partnerships contravenedsections 25 and 53 of the Act.
17. DeLellis made misrepresentations to his clients concerning:
a) the tax consequences of investing in the Bovine Limited Partnerships;
b) the future value of the Bovine Limited Partnerships;
c) the extent of the risks for clients investing in the Bovine LimitedPartnerships;
d) his personal interest in the Bovine Limited Partnerships;
e) whether he would acquire units in the Bovine Limited Partnershipsback from clients if they wished; and
f) the existence of an award-winning bull owned by the Bovine LimitedPartnerships.
18. DeLellis failed to provide offering memorandums for the Bovine LimitedPartnerships to a number of his clients.
19. DeLellis sold Bovine Limited Partnerships to clients for whom suchinvestments were unsuitable.
20. DeLellis failed to deal fairly, honestly and in good faith with his clients.
21. Kennedy, as an officer and director of Piemontese London Ltd., failed to dealfairly, honestly and in good faith with the investors in the Bovine LimitedPartnerships.
TERMINATION OF DELELLIS BY AIC INVESTMENT PLANNINGLIMITED
22. Upon learning of the undisclosed commissions received by DeLellis inconnection with the Bovine Limited Partnerships, DeLellis was dismissed forcause by AIC on October 17, 1995.
23. DeLellis filed a termination notice with the Commission which stated that hewas dismissed or resigned in good standing. AIC failed a termination noticestating that DeLellis was dismissed for cause.
24. DeLellis signed a statement dated October 24, 1995 for AIC after histermination. This statement was filed with staff of the Commission andprovided that DeLellis has "not been involved in any other conduct whilesponsored as a salesperson by AIC Investment Planning Limited which mightbe considered inappropriate".
25. DeLellis advised staff of the Commission after his termination that: (1) he wasunaware of any wrongdoing on his part; (2) he paid $280,000 to AIC'scounsel when the allegation of wrongdoing was made by AIC; and (3)problems with AIC began when DeLellis gave notice of his intention to leaveAIC.
DELELLIS' REGISTRATION ON TERMS AND CONDITIONS
26. On February 29, 1996, DeLellis was re-registered as a salesperson sponsoredby FPG licensed to sell mutual fund securities and limited market productssubject to the branch manager and compliance officer ensuring prior to thesale of any limited market products that all investors acknowledge in writingthat: (1) they have been advised to seek legal, accounting or otherprofessional investment advice; (2) they have received a copy of the offeringmemorandum; and (3) they have signed a disclosure document describing therisks associated with leveraging an account. DeLellis was also to besupervised by the President of FPG and was to file quarterly supervisionreports with the Commission.
27. On February 17 to 19, 1997, a review of DeLellis' files by Staff indicated thatsome of the terms and conditions of his registration were not being met. Thereview also indicated a lack of supervision by FPG over DeLellis.
28. The review of DeLellis' files also indicated the following concerns:
a) DeLellis was receiving part of the commissions paid for the sale ofsecurities in respect of which he was not registered to sell;
b) DeLellis was not being properly supervised by the branch manager forthe London office or the compliance officer of FPG;
c) DeLellis provided investment advice relating to the sale and purchaseof securities which he was not registered to sell;
d) DeLellis was receiving split commissions in respect of the sale ofsecurities which he was not registered to sell;
e) DeLellis provided investment advice which was inappropriate forcertain clients;
f) DeLellis allowed one of his assistants, who was not registered with theCommission, to sign transaction records as a registered salesperson;
g) DeLellis allowed one of his assistants, who was not registered with theCommission, to give instructions regarding the purchase and sale ofsecurities for which DeLellis was not registered to sell;
h) some of DeLellis' files lacked complete "know your client"information;
I) some of DeLellis' files contained pre-signed blank transaction records;and
j) a book distributed by DeLellis to some of his clients listed Mr.DeLellis as the author of a book entitled "Your Guide to FinancialIndependence" which was untrue.
29. A term of DeLellis' registration was that quarterly supervision reports wereto be filed with the Commission by the President of FPG. Quarterlysupervision reports were filed on June 6, September 9 and December 4, 1996.The reports incorrectly stated that:
1. all orders, both buy and sell, and sales contracts have been initialledand reviewed by the supervising officer before execution;
2. all client accounts have been reviewed for:
a) suitability of investments;
b) excess trading; and
c) any changes to client address or any amendments thereto;
3. a review of trading activity on a daily basis has been conductedrelative to Dino Perry DeLellis' client accounts;
4. no transactions have been made in any account until the full andcorrect documentation is in place;
5. there has been no handling of clients' securities and payments by DinoPerry DeLellis and no issuance of cheques to clients withoutmanagement approval; (there have been no payments by Dino PerryDeLellis nor issuance of cheques); and
6. spot audits have been conducted for Mr. DeLellis' client accountsduring the preceding quarter to ensure compliance with theseprocedures and no violation of these procedures were discovered.
CONDUCT CONTRARY TO THE PUBLIC INTEREST
30. The conduct of DeLellis was contrary to the public interest in that:
(a) the conduct of DeLellis in connection with the sale of Bovine LimitedPartnerships was contrary to sections 25(1), 38(1), 38(2), 53(1) and122(1)(b) of the Act;
(b) DeLellis has failed to deal fairly, honestly and in good faith with hisclients; and
(c) DeLellis is in breach of the terms and conditions imposed on hisregistration on February 29, 1996.
31. The conduct of William R. Kennedy in connection with the sale of BovineLimited Partnerships was contrary to sections 25(1), 53(1) and 122(1)(b) ofthe Act and contrary to the public interest.
32. FPG has failed to adequately supervise DeLellis and ensure compliance withthe terms and conditions of DeLellis' registration contrary to the publicinterest."
Hearing
The hearing took place over a six day period. DeLellis was not represented by counsel anddid not appear at the hearing. Kennedy, a lawyer, represented himself and participated in the hearingfrom time to time. At the end of the fifth hearing day, the panel was advised that Kennedy consentedto a clause 127(1) 3 permanent order that the exemptions contained in Ontario securities law do notapply to him.
The Bovine Limited Partnerships
Each of the Bovine limited partnerships (the "Partnerships") was marketed without aprospectus in purported reliance on the "seed capital" exemption from the prospectus requirementsof the Act contained in clause 72(1)(p) of the Act, which exempts a trade if:
"the trade is made by an issuer with a view to the sale of securities of its own issue ifsolicitations are made to not more than fifty prospective purchasers resulting in sales to notmore than twenty-five purchasers and,
(I) each purchaser purchases as principal, and all of the purchases are completed withina period of six months of the first purchase except that subsequent sales to the samepurchasers may be carried out if made in compliance with written agreements enteredinto during that six-month period,
(ii) each purchaser has access to substantially the same information concerning the issuerthat a prospectus filed under this Act would provide and is,
(A) an investor who, by virtue of net worth and investment experience or by virtueof consultation with or advice from a person or company who is not apromoter of the issuer whose securities are being offered and who is aregistered adviser or a registered dealer, is able to evaluate the prospectiveinvestment on the basis of information respecting the investment presented bythe issuer,
(B) a senior officer or director of the issuer,
(C) a parent, brother, sister or child of the person mentioned in sub-subclause (B),or
(D) a person of the opposite sex to whom the person mentioned in sub-subclause(B) is married or with whom the issuer [sic] is living in a conjugal relationshipoutside marriage,
(iii) the offer and sale of the securities are not accompanied by an advertisement and noselling or promotional expenses have been paid or incurred in connection therewith,except for professional services or for services performed by a registered dealer, and
(iv) no promoter of the issuer, other than a registered dealer, has acted as a promoter ofany other issuer which has traded in securities of its own issue pursuant to theexemption in this clause within the previous twelve months,
but an issuer which has relied upon this exemption may not again thereafter rely upon thisexemption."
Except in the case of the sixth Partnership, which was not fully subscribed, there were 25limited partnership interests sold in each Partnership, presumably in order to meet the "seed capital"exemption requirement that there be sales to not more than 25 purchasers.
Each Partnership was organized to carry on the business of acquiring 200 fullbloodPiedmontese frozen embryos to be implanted in host dams for the purpose of producing a herd offullblood Piedmontese cattle, to be raised with the host dams to the weaning age of approximately200 days, the entire herd to be sold within 180 days thereafter.
In each case, the general partner of the Partnership, which was also the manager of the herd,was a corporation wholly-owned by Kennedy, who was its sole director and its president.
Management fees of $35,000, payable in advance, were paid by each Partnership to thegeneral partner for providing management services in connection with the Partnership's herd. In eachcase, except that of the final Partnership which was not fully subscribed, sales commissions of 10%of the amount subscribed were paid in connection with the offering. These fees and commissionswere disclosed in the offering memorandum prepared for the offering of interests in the Partnership.
The tax commentary in each offering memorandum was prepared by Ernst & Young. Itdescribed an advantageous tax treatment for investors, premised on the assumption that thePartnership would be carrying on a farming business which would attract advantageous taxdeductions for losses. It was noted, however, as a risk factor, that no advance income tax ruling hadbeen applied for and that Revenue Canada might take a position different from the views expressedby Ernst & Young.
In the subscription agreement signed by an investor, the investor acknowledged "that he hasbeen advised and encouraged to seek independent legal, accounting and financial advice with respectto this transaction to determine the appropriateness of the investment in relation to his own financialobjectives."
Except in the case of the second Partnership, most or all of the limited partnership interestswere marketed on behalf of the Partnership by DeLellis. It was clear to us from the evidence in thehearing that no such advise and encouragement was in fact given by DeLellis, who, instead, heldhimself out to his clients as the expert adviser on whom they should rely completely.
DELELLIS' MARKETING METHODS
From the evidence which we heard, it would appear that DeLellis' principal method ofobtaining new clients was by means of "educational" seminars, widely advertised and paid for in partby mutual fund management companies, at which "name" speakers would be used to attract a largeaudience, and at which DeLellis would speak as well. In effect, these speakers served as "shills" forDeLellis, recommending him at the seminars as an expert financial adviser on whom reliance couldbe placed for expert advice.
Persons attending the seminars would be asked to give their names etc., so that follow-up callscould be made to them by DeLellis' staff, in order to arrange appointments for those persons withDeLellis, at which DeLellis could make his sales presentation to them. DeLellis had a standard salespatter, which emphasized his expertise, that the investor should rely on him as the expert advisor, thatthe investor should leverage to the full extent possible, so as to make use of "other peoples' money",and that the investor should make tax advantaged investments. In this regard, DeLellis did not seemto pay much attention to whether the investor's tax position enabled him or her to obtain the taxbenefit. Nor did he seem to pay any particular attention to whether the investor's income and cashflow would enable the investor to service the indebtedness to be incurred as a result of the leveraging,which DeLellis suggested be obtained by mortgaging whatever equity the investor had in his or herhome.
In the case of investors who gave evidence at the hearing, and many others, DeLellis arrangedthe mortgage financing for the investor through National Trust Company Limited ("National Trust"),primarily at its London office where his contact was Jamie Hodgins.
After the initial couple of meetings with an investor, DeLellis would make hisrecommendations, usually consisting of a mix of mutual fund units being marketed by DeLellis andlimited partnerships being marketed by him, and the investor would be handed off to one of DeLellisassistants, to be thereafter normally dealt with personally by DeLellis only when he wanted to marketfurther products to them.
DELELLIS' REGISTRATION
During the period relevant to these proceedings, DeLellis was employed, until October 17,1995 by AIC Investment Planning Limited ("AIC"), and after February 29, 1996 by The Height ofExcellence Financial Planning Group Inc. ("THE"), and was registered by the Commission as asalesperson, sponsored by the applicable employer, in the categories of mutual fund dealer and limitedmarket dealer (conditional). As a result of concerns which Staff had with DeLellis' conduct whilewith AIC, his registration as a salesperson with THE was subject to a number of conditions, largelydealing with his supervision. Under both registrations, DeLellis was permitted to sell only mutualfund units and limited market securities, such as securities sold under the "seed capital" exemption.
Witnesses at the Hearing
At the hearing, eight clients of DeLellis who had purchased interests in one or more of thePartnerships, as well as other securities recommended by DeLellis, gave evidence. We found eachof them to be an entirely credible witness. In almost every case, the witness was an inexperiencedinvestor, with low risk tolerance, who relied completely on DeLellis for investment advice, tookDeLellis' advice to borrow on the security of the investor's home to invest in securities recommendedby DeLellis, invested in interests in Partnerships which, in most if not in all cases, were unsuitableinvestments for them, and remain saddled with substantial indebtedness which they, in most cases,have little prospect of being able to pay off.
We also heard evidence from Alan Cameron, who was a salesman with the London office ofAIC during part of the period in which DeLellis was employed by that company at that office, DavidVitch, who was the branch manager of the London branch of THE during the period in whichDeLellis was employed by that company at that office, and Anna Pacifico, who was one of DeLellis'assistants at AIC. Both Cameron and Vitch gave evidence which supported what we had heard fromthe client witnesses about DeLellis' selling methods. Although we felt Pacifico's evidence to besomewhat self-serving in respect of her participation in sales made by DeLellis, it too supported whatwe had heard from the client witnesses as to DeLellis' selling methods.
We also heard evidence from Jamie Hodgins, the employee of National Trust in its Londonoffice who had supplied many of DeLellis' clients with leveraging loans, Kris Astaphan, an officer ofAIC, Roy Hains, a forensic accountant who had been retained by AIC and the corporations whichreplaced Kennedy's corporations as general partners of the Partnerships to investigate what hadhappened to the funds of the Partnerships, and Karen Morrow, a Staff accountant who participatedin an investigation of DeLellis' activities at the AIC London office and THE's London office.
As above indicated, DeLellis neither appeared nor was represented by counsel at the hearing.Although Kennedy did appear from time to time, he did not choose to give or call evidence.
The Results of the Carrying on of the Bovine Businesses
Interests in one or other of the Partnerships were marketed from June of 1992 through partof 1995. After a period, each limited partnership was dissolved, and its assets transferred to acorporation of which interestholders in the Partnership became shareholders. On April 26, 1996,these corporations were amalgamated to form Aosta Piedmontese Limited.
Although, under its offering memorandum, each limited partnership was to purchase andimplant 200 frozen embryos, by the summer of 1995 there would appear to have been very fewanimals owned in total by the corporate successors to the first four Partnerships, none owned by thelast two Partnerships, and little or no cash remaining in any of their accounts. At meetings of theshareholders of the corporate successors to the first four Partnerships held in June of 1995, Kennedyadvised that the time frame for profitability of the herds had been misjudged, and proposed a sevenyear plan to profitability, and consolidation of the herds.
Apart from the siphoning off of funds of the Partnerships to or for the benefit of DeLellis andKennedy to which we refer below, we were not given any explanation of why the Partnershipsdismally failed to achieve the results contemplated for them in their offering memoranda. We notehowever that Revenue Canada has disallowed the deduction by investors in the Partnerships offarming losses and interest charges claimed in connection with the operation of the Partnerships onthe basis that there was no reasonable expectation that the partnerships would generate gross profitsexceeding their expenses, and has reassessed the investors accordingly.
Undisclosed Payments to DeLellis
As we have said, except in the case of the second Partnership, of which DeLellis sold only a portionof the interests sold, DeLellis sold all interests which were sold in the Partnerships. In the case of thefirst two Partnerships, he received 100% of the commissions payable on interests sold by him. In thecase of the other four Partnerships, in connection with which AIC was the agent, DeLellis receivedfrom AIC 85% of the commissions paid to AIC in respect of the sale of the interests. Thesecommissions, payable by the Partnerships, were paid in accordance with, and were disclosed in, theoffering memoranda for the partnerships. These offering memoranda did not, however, disclose thatany other payments would be made by the limited partnerships to AIC or to DeLellis.
At a meeting held at AIC's head office in the summer of 1995, DeLellis admitted to seniorofficers of AIC that he had received from Asil Inc. ("Asil") additional payments, eventually disclosedto total $280,009.48, in connection with the Partnerships. He agreed to pay this sum back to thePartnerships. In a certificate dated October 20, 1995, DeLellis certified that the list attached,describing these payments, "sets forth all payments" received by him from Asil.
Asil was a corporation, owned by one Gordon Coles, which contracted with the Partnershipsto do, under the supervision of the general partners, the actual work involved in building andmaintaining the Partnerships' herds.
In fact, the payments disclosed in the certificate were not the only payments received byDeLellis from Asil. Asil also made additional substantial payments to or for the benefit of DeLellis.
All of the payments were made by Asil out of moneys paid by the Partnerships to Asil for usein the care and maintenance of the herds, and none were disclosed in the offering memoranda.
As if all of this was not enough, the third and fourth Partnerships paid additional undisclosedcommissions totalling $98,000 to DeLellis. The cheques for these payments were signed by Kennedyon behalf of the Partnerships. Although DeLellis claimed that these payments were made as a resultof a mistake, and that he had repaid the moneys, in fact the alleged repayments, if made at all, weremade by DeLellis not to the Partnerships involved, but to corporations owned by Kennedy.
And in addition DeLellis had an arrangement with National Trust under which he was paida referral fee for each investor directed by DeLellis to National Trust to obtain the leveragingfinancing to which we have referred. The evidence which we heard satisfied us that these fees werenot disclosed by DeLellis to investors either or, indeed, to his employer AIC. Although these feeswere relatively modest in amount, they evidence what to us was clearly DeLellis' attitude to hisclients, that is that they were sources of revenue to be taken advantage of in every way possible, andnot persons in whose best interest he had any responsibility to act.
It is also important to note that, even if the Partnership interests had otherwise qualified assecurities to which the "seed capital" exemption applied, the payments to DeLellis by Asil and thePartnerships, which in our view were "selling or promotional expenses -- paid or incurred inconnection with" the offering and sale of the interests, resulted in the exemption not being available.As a result, no other exemption being available, the interests in the Partnerships were unlawfullytraded by the Partnerships and by DeLellis without a prospectus contrary to the prohibition containedin sections 53 of the Act.
Failure to Deliver an Offering Memorandum
Although an offering memorandum was prepared in connection with each offering ofPartnership interests, the evidence discloses that it was not always delivered to investors, by DeLellisor anyone else, prior to the trade in the interest.
Under clause 72(1)(p) of the Act, the "seed capital" exemption is only available if "eachpurchaser has access to substantially the same information concerning the issuer that a prospectusfiled under [the] Act would provide." The failure to provide investors with the offering memorandummade the exemption unavailable, even if it would otherwise have been available.
Misrepresentations by DeLellis
Staff has alleged that DeLellis made a number of misrepresentations to his clients with respectto the tax consequences of investing in the Partnerships, the future value of Partnership interests, theextent of the risks involved, and his personal interest in the Partnerships. On the evidence, we findthat DeLellis did make such misrepresentations, and this is without question completely unacceptablebehaviour for a registrant. However, in our view, what is even more reprehensible is that thesemisrepresentations were in our view part of a course of conduct designed to cause DeLellis' clientsto borrow funds for investment through him, whether or not it was advisable for them to make suchborrowings, and to invest in securities, such as interests in the Partnerships, whether or not suchinvestments were appropriate to their investment needs and risk tolerance levels, with a view toincreasing DeLellis' earnings and not with a view to providing his clients with suitable or appropriateinvestment advice.
DeLellis' Activities at THE
Staff alleges that, while with THE,
a) contrary to the conditions of his registration, DeLellis was not supervised by thebranch manager of THE's London office, or indeed, appropriately by anyone;
b) he provided investment advice relating to the sale and purchase of securities which hewas not registered to deal in;
c) he provided inappropriate investment advice;
d) he received split commissions in respect of the sale of securities which he was notregistered to sell,
e) he allowed an assistant, not a registrant, to sign transaction records as the registeredsalesperson;
f) he allowed an assistant, not a registrant, to give instructions to purchase and sellsecurities in which DeLellis was not registered to trade;
g) some of his files lacked complete "know your client" information, and some containedpre-signed blank transaction records; and
h) a book distributed by DeLellis to some of his clients listed him as one of its authors,which he was not.
The evidence presented to us supports these allegations, and all of this activity took place at a timewhen DeLellis knew that Staff had serious concerns about his activities while at AIC, and hadconditioned his registration to attempt to deal with these concerns. His activities while at THE, atthe very least, exhibited a complete disdain for his obligations as a registrant, and clear evidence thatthe leopard had no intention of changing his spots.
Obligations of a Registrant
As stated by the Commission in In the Matter of E.A. Manning Limited et al (1995), 18O.S.C.B. 5317 at p. 5330, the Commission has long considered the obligation to deal fairly, honestlyand in good faith with its customers as one which a registrant must be considered to have assumedwith a registration under the Act. The Commission went on to say that:
"We agree fully with the Staff's contention that the investing public in the Province ofOntario, and the Commission, have, and are entitled to have, a reasonable expectation thatOntario registrants will not ignore the questions of suitability and appropriateness of aproposed investment to and for the client, and will not peddle inappropriate securities toclients by use of high pressure selling tactics designed to induce, and having the effect ofinducing, clients to purchase securities inappropriate to their situation on the basis ofinadequate investment information and/or misinformation as to the issuers of the securities,the value of the securities and the prospects of the issuer and the securities. Such a holdingis essential to the integrity of the capital markets of Ontario, and to the credibility of thosemarkets. It is also necessary for the protection of the investing public.
This holding should not be a surprise to the Respondents. It is consistent with and supportedby decisions of the Commission going back at least as far as 1952."
In In the Matter of Trend Capital Services Inc. et al (1992), 15 O.S.C.B. 1711, the Commission saidat p. 1762 the following.
"Section 102(4)(b) [now section 114(4)(b)] of the Regulations to the Act provides in part asfollows: "each dealer...shall make such inquiries as...are appropriate in view of the nature ofthe client's investment and of the type of transaction being effected for its account, as to thegeneral investment needs and objectives of each client and the suitability of a proposedpurchase or sale for that client."
This regulation, which is known as the "suitability and know your client" requirement, isfundamental to the obligation of every dealer dealing with the public."
The Commission went on to say at p. 1763:
"The core of the allegations in the Notice of Hearing is that the Respondents and each of themfailed to deal fairly, honestly and in good faith with Trend's clients. This is the fundamentalrequirement of every Registrant, and is set out clearly and unequivocally in Regulations 196and 197. There was an abundance of evidence by witnesses, not only those called by staff butof those Respondents who testified which established this to our entire satisfaction. Thismatter is similar in many respects to that which the Commission considered in the case of Inthe Matter of Rosmar Corporations Limited et al (1982) 3 O.S.C.B. 11C. As theCommission pointed out at p. 35c and following "a special obligation devolves upon thosewho are registered in this province to sell securities. Securities may not be sold as any othercommodity to any willing buyer. The potential for harm to the unwilling, the unsophisticatedand the naive, even though they may well be greedy and hope for the return of a quick dollar,calls for the surveillance of securities sales techniques."
In In the Matter of Goldmack Securities Corporation (1966) O.S.C.B. 18 the Commissioncommented that a Respondent was "of the view that his actions met the acceptable standardsof the business", and went on to say, "As a registrant he should have appreciated that hisresponsibility to the public is at a much higher level than his conduct indicates. A registrantengaged in the distribution of securities has a responsibility not only to his particular client,but to the public at large." These words apply equally to each of the Respondents in this case,each of whom in our view displayed a total disregard for the interests of anyone other thanthemselves. The Commission has made it clear on many occasions that by seeking andholding registration, registrants represent that they will deal fairly with the public as indeedthey are required to do under the Regulations. We are satisfied that not one of theRespondents in this case met this basic requirement.
The regime of securities regulation established by the Act and the Regulations, and discussedin decision of the Commission and the Courts makes it clear that obtaining registrationentitling persons to deal with the public is a privilege and not a right and that this mustconstantly be borne in mind. As part of this, every salesperson must among other things, befamiliar with and follow the precepts of the Manual for Registered Representatives. Havingsat through this hearing, it is clear from even a cursory review of the Manual that theRespondents in this case and each of them was either unaware of or paid scant attention tothe Manual. The very first item in the Code of Ethics and Conduct for RegisteredRepresentatives provides that the client's interest must be the foremost consideration in allbusiness dealings. It was not in this case. The code provides that all methods of solicitingand conducting business must be such as to merit public respect and confidence. They werenot in this case.
In short, there was a total disregard by all of the Respondents of even the most basicobligations and responsibilities which go with registration and the resulting privilege ofdealing with and selling securities to the public.
We are satisfied that most if not all of the Trend customers who gave evidence were innocentvictims who relied upon Trend and its salespeople deal fairly and equitable with them. In anyevent, the Commission has long held that, as the then Director of the Commission said in theAdelaide Securities Limited case, 1968 OSCB 57 "Whether one believes one or more of thesepurchasers to be stupid or naive, gullible or greedy, this does not make them fair game for theparty who seeks them out."
DeLellis' failure to comply with the obligations of a registrant as described in these decisionswould, by itself, provide a more than sufficient basis for imposing clauses 127(1) 1 and 3 sanctionson DeLellis.
Breach of Fiduciary Duty
DeLellis held himself out to his clients as a skilled, knowledgable and experienced investmentadviser, who could be relied on to advise the client well and take care of the client's interest, and onwhom the client could completely depend for disinterested investment advice. He sought andobtained the trust of his clients. As a result, DeLellis was in a fiduciary relationship with his clients,and, as a result, had, in equity, a strict obligation to deal fairly, honestly and in good faith with theclient and to fully disclose to the client, in a timely manner, all information in DeLellis' possessionrelevant to the transactions in which the client was involved. This obligation existed as a matter ofgeneral law. See Manning at p. 5340, Hodgkinson v. Simms [1994] 3 S.C.R. 377 at p. 419, Burkev. Cory (1959), 19 D.L.R. (2d) 252 at p. 258, Scherer v. Zacks [1952] 4 D.L.R. 503 at p. 506.
DeLellis clearly failed to disclose to his clients a number of relevant facts, including the factthat, as regards the Partnerships, he was receiving substantial payments in addition to thosecontemplated by the offering memoranda, which payments could, in our view, clearly be expected toinfluence the advice which DeLellis was giving to his clients.
In our view, DeLellis' failure to fulfil his fiduciary obligations provides another basis on whichwe can properly sanction him under clauses 127(1)1 and 3 of the Act.
Breaches of the Act
The evidence which was presented to us disclosed a number of breaches by DeLellis of therequirements of the Act and of the regulations made thereunder. Perhaps the most serious of thesewas the improper use of the "seed capital" exemption, resulting in the sale of interests in thePartnerships without a prospectus, contrary to section 53 of the Act.
These breaches, in our view, provide yet another appropriate basis for the exercise of ourclauses 127(1) 1 and 3 jurisdiction.
Kennedy's Activities
The bulk of Staff's case against Kennedy was presented through the witness Hains. A gooddeal of what Hains had to say about Kennedy was hearsay, and we have ignored this hearsayevidence. But we are satisfied that there remained more than enough acceptable evidence to establishthat Kennedy received or directed for his benefit substantial undisclosed payments from Asil, failedto ensure that purchasers of Partnership interests received offering memoranda, participated in themaking of undisclosed payments to DeLellis and made untrue statements to investors in thePartnerships.
Kennedy was the president, secretary and treasurer of Piedmontese London Limited ("PLL"),which was registered with the Commission as a limited market dealer (conditional) from September24, 1992 to September 24, 1996, and participated as promoter in the Partnerships, as well as beingthe agent in the sale of the interests in the first two Partnerships. He had the registrant's duty ofdealing fairly and equitably with the registrant's clients to which we have already referred. He didnot fulfil this obligation. In addition, he, and his corporations, abused PLL's positions as promoterand agent.
As we have stated, the sales of Partnership interests did not attract the "seed capital"exemption, and Kennedy participated in unlawful sales of these interests without a prospectuscontrary to section 53 of the Act.
Kennedy showed no remorse whatsoever for his participation in very serious breaches of theAct and of his obligations under the Act. Instead, he agreed to accept a permanent clause 127(1) 3order, because, as he stated, "my trading privileges really doesn't [sic] affect me from an economicstandpoint".
The Nature of These Proceedings
The regulatory nature of proceedings of this type was described by the Divisional Court inGordon Capital Corporation v. Ontario Securities Commission (1991), 14 O.S.C.B. 2713 at p. 2723as follows.
"The general legislative purpose of the Act and the OSC's role thereunder is to preserve theintegrity of the capital markets of Ontario and protect the investing public. In this context,the proceedings against Gordon and Bond under subsection 26(1) of the Act are properlycharacterized as regulatory, protective or corrective. The primary purpose of the proceedingsis to maintain standards of behaviour and regulate the conduct of those who are licensed tocarry on business in the securities industry. The proceedings are not criminal or quasi-criminal in their design or punitive in their object. This distinction has been made in a numberof cases involving proceedings of a regulatory or public protective nature such as that underSubsection 26(1) of the Act."
The Commission, in In the Matter of Trend Capital Services Inc. et al (1992), 15 O.S.C.B.1711 at p. 1748, outlined the basis on which the Commission should proceed.
"Staff, in the Notice of Hearing which initiated these proceedings, have asked the Commissionto sanction the Respondents for a variety of alleged activities all of which involved the salesof shares of Thunder Bumpers to members of the public.
In making an order under either of these statutory provisions [i.e. the provisions whichcorresponded to clauses 127(1) 1 and 3], the Commission must come to the opinion that itis in the public interest to do so. The Courts and the Commission in prior hearings haveestablished guidelines as to when and in what circumstances the discretion vested in theCommission by the Act should be exercised. It has long been recognized that theCommission's jurisdiction and consequently its responsibility under section 27(1) of the Actis very broad. In the case of Re the Securities Commission and Mitchell [1957] O.W.N. 595,Laidlaw, J.A. said
"The Commission has the right to suspend or cancel registration of anyperson, notwithstanding the fact that there has been no breach of anyprovision of The Securities Act or any regulation made thereunder: Re TheSecurities Act and Gardiner, et al., [1948] O.R. 71 at p. 80, [1948] 1 D.L.R.611."
and
"Finally, the Commission may properly form its opinion to suspend or cancelany registration in the public interest without proof of actual injury to thepublic."
The Commission itself has repeatedly held that the discretion vested in it should be exercisedin favour of making an order where the evidence establishes that there has been a reasonablelikelihood that such conduct may continue in the future unless the Commission moves toprevent a recurrence. Examples of this view of the Commission may be found in the recentdecisions of Re Mithras Management Ltd. (1988) 11 OSCB 1600 and Re Gordon CapitalCorporation and David Bond (1990) 13 OSCB 2035. The latter decision of the Commissionwas upheld by the Divisional Court and reported in (1991), 14 OSCB 2714.
Arguments were addressed as to the standard of proof which we should apply, having regardto the fact that in this hearing we may well be considering sanctions affecting the ability ofpeople to earn their livelihood. In our view the burden of proof rests with staff of theCommission to establish to the satisfaction of the panel that it is obliged, in order to protectthe public interest, to sanction the Respondents. We in determining this have had to balancethe interest of the Respondents in their right to earn a living in the investment industry and,in the case of Trend, to run a business and employ approximately 50 people, against ourobligation to protect the public interest.
Both sections of the Act under consideration require us to form an opinion that a decision tosanction is in the public interest. In our opinion there are two issues which requireconsideration. The first, already mentioned, is whether or not, assuming the conduct isobjectionable, there is a reasonable likelihood it will be repeated. The second is whether ornot the conduct of the Respondents, if objectionable, is such as to bring into question theintegrity and reputation of the capital markets in general. These were the tests which wefollowed in reaching our conclusions.
The burden of proof which staff must satisfy before we decide to act under these sections isnot in our view as strong as that which would be required if these were criminal proceedings.In any event, in this case there was really no doubt left in our minds as to the conductcomplained of in fact having occurred, or the necessity of sanctions being imposed."
Imposition of Sanctions
We have no doubt whatsoever that the conduct complained of in fact occurred. The questionwhich must then be determined is whether sanctions are appropriate and, if so, what the sanctionsshould be.
In In the Matter of Mithras Management Ltd. et al (1988), 11 OSC 1600 at p. 1610, theCommission set out the relevant considerations as follows:
"Under sections 26, 123 and 124 [now section 127] of the Act, the role of thisCommission is to protect the public interest by removing from the capitalmarkets - wholly or partially, permanently or temporarily, as thecircumstances may warrant -- those whose conduct in the past leads us toconclude that their conduct in the future may well be detrimental to theintegrity 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. Weare here to restrain, as best we can, future conduct that is likely to beprejudicial to the public interest in having capital markets that are both fairand efficient. In so doing we must, of necessity, look to past conduct as aguide to what we believe a person's future conduct might reasonably beexpected to be; we are not prescient, after all. And in so doing, we may wellconclude that a person's past conduct has been so abusive of the capitalmarkets as to warrant our apprehension and intervention, even if no particularbreach of the Act has been made out. Equally, however, even if there hasbeen a technical breach of the Act, we may well conclude that, in thecircumstances, no sanction is necessary to protect the public interest."
Similarly, in In the Matter of Gregory McGroarty et al (1990), 13 OSCB 3887 at p.3934, the Commission stated:
"we would say first that this present proceeding is not, as respondent'scounsel seemed to characterize it, the trial of a provincial or criminal offencein which the prosecutor must make out every element of the offence chargedbefore a conviction can be registered. Ours is an administrative proceeding,the focus of which is the protection of the public and not the punishment ofan individual."
We agree with these statements. We have no crystal ball which would enable us topredict the future. The only way in which we can realistically look at the question of whatmay happen in the future in a case of this sort is to consider what the actions of therespondents have been in the past. On the evidence, we are satisfied that it is necessary toimpose sanctions under clauses 127(1) 1 and 3.
DeLellis' activities, and his disregard for the interests of his clients, were egregious. Afterbeing caught out at AIC, he commenced to sin again at THE. He did not bother to attend at thehearing before us. There is no indication whatsoever that he appreciates just how grievous hisoffenses were. There is, in our view, every reason to believe that, if permitted to do so, he wouldonce again act in complete disregard of the interests of his clients. To permit this to happen wouldcall into question the credibility of our capital markets.
Like DeLellis, Kennedy gave no indication that he appreciates that what he did in respect ofthe Partnerships was wrong. His actions showed a callous disregard for the obligations of aregistrant, a promoter and an agent, and for any claim of purchasers of the product he was creatingto fair treatment. We see no reason to doubt that, if permitted to continue to participate in the capitalmarkets of this Province, Kennedy would continue to exhibit a disregard for the interests of investorsand the well-being of those markets.
Unless DeLellis and Kennedy are removed from the capital markets, then, based on their pastperformance, there is, in our view, every reason to believe that they will continue to act in the samemanner.
The Staff has made out its case that it is in the public interest for us to make the followingorders.
Accordingly, we order that:
a) DeLellis' registration under the Act is terminated (in our view he should never againbe permitted to be a registrant under the Act); and
b) on a permanent basis, the exemptions contained in Ontario securities law do not applyto either DeLellis or Kennedy,
and in this order, "Ontario securities law" has the meaning ascribed to that term in the Act.
January 13th, 1998.
"J. A. Geller" "J. F. Howard"
"Derek Brown"