Decision and Reasons: In the Matter of Brian Patrick Verbeek

IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c. S.5, as amended

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IN THE MATTER OF
BRIAN PETER VERBEEK

Hearing:

December 6,7,8,9 and 10, 2004; February 14 and 15, 2005; and March 2, 2005, with written argument including that from Verbeek, received on April 26, 2005.

Panel:

Counsel:

DECISION AND REASONS

Introduction

[1] This is a hearing under sections 127 and 127.1 of the Securities Act (the “Act”), pursuant to a Notice of Hearing issued on October 8, 2003 and amended on July 27, 2004, regarding Brian Peter Verbeek (“Verbeek”). The Commission previously approved settlements with Lloyd Hutchinson Ebenezer Bruce and Dundee Securities Corporation (“Dundee”) dealing with the same circumstances as this matter.

[2] At the request of Staff and Verbeek, the panel ordered a bifurcated hearing with the issues of whether Verbeek breached the Act or acted contrary to the public interest being heard first, followed by submissions on sanctions, if necessary.

[3] During the presentation of Staff’s evidence on December 9, 2004, the then Chair of the panel, Commissioner Robert L. Shirriff, became aware that one of his partners had previously represented Verbeek, and he recused himself and withdrew from the panel.

[4] Verbeek was granted an adjournment and the opportunity to obtain independent legal advice, at the Commission’s expense, on whether the hearing should continue with a panel of the two remaining commissioners pursuant to section 4.4(1) of the Statutory Powers Procedure Act, R.S.O. 1990, c. S.22 (the “SPPA”). On January 14, 2005, after obtaining independent legal advice, Verbeek advised that he had no objection to continuing the hearing with a panel of the remaining two Commissioners.

BACKGROUND and staff’s allegations

[5] At the heart of this matter are arrangements, which Staff refers to as “schemes”, that involved advertisements offering “fast financial assistance” or low interest loans to persons wishing access to funds in their locked-in registered retirement savings plans (“locked-in RRSPs”). Normally, holders of locked-in RRSPs (“holders”) cannot access the money in locked accounts until they retire, with the exception of a government administered hardship program. Any funds accessed are immediately taxable. Funds or assets held in retirement savings plans cannot be used as collateral nor can they be used for loans.

[6] The arrangements involved the following sequential steps:

[7] Verbeek participated in at least 670 such arrangements. His role in the arrangements between 1998 and 2000 (the “material time”) is the subject of five allegations:

1. Verbeek participated in illegal distributions of securities, contrary to section 53(1) of the Securities Act, by trading securities for which there was no exemption available;
2. Verbeek failed to ascertain the general investment needs and objectives of his clients and the suitability of the purchases or sales of the securities for his clients, and thus acted contrary to the public interest and contrary to section 1.5 of Ontario Securities Commission Rule 31-505;
3. Verbeek acted contrary to the public interest by participating in the scheme that involved the subsequent loans to investors of approximately 65% of the share purchase and by charging an administration fee to the investors of 35% of the loan proceeds;
4. Verbeek acted contrary to the public interest by processing documents that referenced “Lafferty, Harwood and Partners Ltd.” without Lafferty’s knowledge and at a time when Verbeek was not registered through Lafferty; and
5. On or about February 14, 2001 and February 22, 2001, in response to inquiries made by Staff, Verbeek advised Staff that he did not know that advertisements had been placed; that he did not know that the transactions involved loans to the investors; and that he had not received compensation for his involvement in these transactions. At the time Verbeek made these representations to Staff, he knew that they were misleading or untrue and, therefore, acted contrary to the public interest.

DECISION and overview of the reasons

[8] We find that Verbeek violated the above-noted provisions of the Act and Rule 31-505 and that he acted contrary to the public interest.

[9] As discussed, below, we find that Verbeek participated in distributions of CCPC shares for which no prospectus exemptions were available. He participated in the arrangements not merely as an administrative conduit between the CCPC promoters and the trust companies, but on behalf of the CCPC promoters, and as a registered representative on behalf of the holders. He failed in his obligation to ascertain the general investment needs of his clients, the holders. He failed to ascertain the suitability of the purchase of the CCPC shares for the holders, largely low-income earners who were in immediate need of cash. Verbeek participated in the arrangements despite published warnings by the Commission that schemes like the arrangements were considered harmful to investors and contrary to the public interest. His participation was for his own financial benefit at the expense of unsophisticated investors who needed financial assistance. Although he had intimate knowledge of the arrangements, he misled Staff during the investigation of this matter.

The Agreed Statement of Facts

[10] An “Agreed Statement of Facts”, signed on September 20, 2004 by Staff and Verbeek, was filed at the commencement of the hearing. Verbeek disagreed with, or claimed he had no knowledge of, facts in paragraphs (n), (s), (v), (w), (gg), and (hh) of the Agreed Statement of Facts. For convenience, the statements that Verbeek claimed he disagreed with or had no knowledge of are marked with an asterisk.

SUBMISSIONS AND ANALYSIS

1. Participation in an illegal distribution

[13] Staff’s first allegation is that Verbeek participated in illegal distributions of securities, contrary to section 53(1) of the Securities Act, by trading securities for which there was no exemption available.

Staff’s Submissions

[14] Staff submits that Verbeek traded in shares sold to the public through advertisements, where no exemptions existed at that time for these individuals to purchase the securities. He opened a NCAF for every client and processed the trades. He was the “registered representative” in the CCPC transactions and his conduct was consistent with the definition of “trade” as defined in section 1(1) of the Act.

[15] Staff submits there is no evidence to the contrary, and that the trades in question were distributions because the securities that Verbeek traded in had not been previously issued.

[16] Verbeek cannot rely on the exemption for private companies contained in section 73(1)(a) and paragraph 10 of section 35(2) of the Act, because such an exemption would only be available in the case of “securities of a private company where they are not offered for sale to the public.” Staff submits that Verbeek traded in shares offered to the public, solicited through advertisements, where no exemptions existed at the time for these individuals to purchase the securities.

[17] Staff submits that Verbeek was aware at all times that the public was solicited through advertisements. From approximately August of 1998 to November of 2000, he participated in arrangements whereby advertisements were placed in newspapers throughout Ontario and other provinces which offered “fast financial assistance” to persons wishing access to funds in their locked-in RRSPs. Verbeek admitted that some of the purchasers of shares of the Petrement Group of Companies were originally solicited via the advertisements and also admitted to placing one such ad himself. Staff argues that it is inconceivable Verbeek did not know that advertisements were placed with respect to the arrangements involving the Tremblay Group, because these arrangements were the same as those of the Petrement Group and, during a certain period, he participated in arrangements concurrently with both Groups.

[18] Staff’s submits that Verbeek has failed to meet the burden of proof that an exemption existed. Verbeek did not explain why he, as a registered representative, participated in a transaction without a preliminary prospectus or prospectus having been filed.

Verbeek’s Submissions

1(a) No “trade” was involved

[19] Verbeek submits that the CCPC share transaction was not a “trade” as defined by the Act. Therefore he could not have participated in an illegal distribution.

[20] All of the CCPC transactions with the Petrement Group and Tremblay Group involved the purchase of shares from a CCPC issuer for the purpose of giving collateral for a loan or debt made in good faith, and the Act specifically excludes such a transaction from the definition of a “trade”:

“trade” or “trading” includes,

(a) any sale or disposition of a security for valuable consideration, whether the terms of payment be on margin, instalment or otherwise, but does not include a purchase of a security or, except as provided in clause
(d), a transfer, pledge or encumbrance of securities for the purpose of giving collateral for a debt made in good faith, [emphasis added]

[21] Verbeek submits that Staff’s allegations are groundless as he could not have acted as a registered sales person or dealer because both of these roles, as they are defined in the Act, involve making trades. Verbeek submits the trade was in the private transaction between the holder and the CCPC. It would be impossible to evaluate the suitability, merits and risk of the investment, because there was no “investment” here: the shares were purchased solely for the purpose of giving collateral for a loan. The only risk for the holder would be that the Petrement or Tremblay Groups would fail to grant the loan.

1(b) Argument in the Alternative – Verbeek’s Role in the Arrangements

[22] Verbeek argues that he did not participate in the purchase and sale of the CCPC shares, but acted solely as an administrative conduit between the CCPC and the trustee. He says that the opening of the new self-directed locked-in RRSP and the transfer of assets from the existing locked-in RRSP to the new account do not constitute participation in the CCPC share transaction or in the loan. He argues that until the transfer (and liquidation of any non-cash assets), the holder had many investment options available within the new locked-in RRSP, such as investment in conventional publicly traded stocks or mutual funds. The holder was free to back out of the CCPC share purchase and the loan transactions at this time.

[23] He submits that the CCPC share purchase was a private transaction. The only person who dealt with the holder was a salesperson hired by the Petrement or Tremblay Groups, who provided a Letter of Direction to Purchase the CCPC shares to the holder for signature. This letter indicated the number of CCPC shares, the purchase price per share, and the total purchase price. The letter directed the trustee to issue a cheque for the full price to the CCPC from funds in the holder’s new account, and to provide the cheque to Verbeek’s office.

[24] The Letter of Direction to Purchase was part of a complete “CCPC package” of documents provided by the salesperson and signed by the holder at the time of their meeting. The CCPC package consisted of: the Letter of Direction to Purchase; letters of indemnity to Verbeek and the dealer/trust company; letters from the CCPC, including declarations from accountants stating the fair market value of the shares and that the CCPC was a qualified investment for RRSP purposes; and a share certificate in the name of the dealer/trust company in trust for the holder.

[25] Verbeek’s office took delivery of and forwarded the CCPC package to the trust company. When he was registered, this was done via the compliance department of the dealer. When he was not registered, he sent the CCPC package directly to the independent trust company. The trustee processed the CCPC Package, executed the CCPC share purchase for the holder’s account, issued a cheque from the holder’s account, and sent it to Verbeek’s office. A representative of the Petrement or Tremblay Group picked up the cheque or Verbeek mailed it to the CCPC.

[26] Verbeek maintains that no part of the CCPC package required his signature, nor did any document direct him to perform any action with respect to the trade. The trustee required no further information from or participation by Verbeek in order to process and execute the purchase of the CCPC shares for the holder’s self-directed locked-in RRSP account.

[27] Verbeek argues that the trustee was responsible for opening a registered plan account as a locked-in RRSP under the Income Tax Act. The holder was solely responsible for determining that each asset acquired by the self-directed locked-in RRSP was a qualified investment, and that they were aware of the tax consequences with respect to non-qualified investments therein.

[28] Verbeek submits that he did not meet or advise clients with respect to the CCPC transaction; they were unsolicited and treated as such.

[29] Verbeek denies he was compensated for his role as an administrative conduit in the arrangements. Any compensation he received related to transactions that he conducted on behalf of the holders outside the CCPC share purchase and the CCPC loan. In cases where the holder’s locked-in RRSP was transferred to the brokerage or independent trustee prior to being liquidated (transferred “in kind”), Verbeek acted as the holder’s registered representative and sold the shares for cash within the locked-in RRSP. Verbeek submits that he did not direct the holders to transfer or liquidate their locked-in RRSPs; rather the holders directed their existing institutions to transfer the assets of their existing plans to the new self-directed locked-in RRSP at the trustee. In many other cases, a small amount of cash remained in the holder’s new locked-in RRSP after the completion of the arrangement. Verbeek would then act as the holder’s registered representative for the purchase of investments such as mutual funds or pre-authorized chequing plans. In both types of cases, Verbeek says he was compensated normally.

Analysis

[30] With respect to staff’s first allegation, we must determine whether (1) a trade was involved that (2) constituted a distribution for which (3) no preliminary prospectus or prospectus was filed, and there was no available exemption from the prospectus requirement. If all elements are present, we must determine whether Verbeek traded in the securities in question.

[31] The relevant statutory provisions are as follows:

[32] Section 53(1) of the Act provides:

[34] The term “distribution” is defined in section 1(1) of the Act to mean “a trade in securities of an issuer that have not been previously issued”.

[35] Section 73(1)(a) together paragraph 10 of section 35(2) of the Act set out an exemption to the prospectus requirement of section 53. Section 73(1) provides:

[36] The relevant portion of section 35(2) reads:

Trade, distribution, and prospectus requirement

[37] Verbeek argues that the CCPC share transactions were solely purchases and, therefore, under paragraph (a) of the definition of “trade”, not a trade. We disagree. Paragraphs (h) and (o) of the Agreed Statement of Facts, among other evidence, establish that Verbeek was acting on behalf of the CCPC promoters, in addition to acting for holders who responded to advertisements.

[38] The exclusions in paragraph (a) of the definition of a trade shield a purchaser or a debtor, but not a seller or person disposing of a security to the purchaser in a transaction. The act of purchasing a security is not, from the perspective of the purchaser, a “trade”. Similarly, pledging shares as collateral for a loan is also not a trade from the perspective of a debtor who does have a controlling interest in the issuer. The exclusions in this paragraph do not apply to sellers, dealers, or persons acting on their behalf in a sale or disposition, whose conduct may be caught by paragraphs (a) to (e) of the definition. In conclusion, the same transaction may constitute a “trade” as it relates to the seller, dealer, or other person acting on their behalf, even if it may be not be a “trade” as it relates to the buyer or debtor.

[39] It is because of Verbeek’s role on behalf of the sellers/promoters in the arrangements that he was trading in securities in the course of a distributions.

[40] In the circumstances of this case, we find that the CCPC transaction was a “trade” within the meaning of the Act. It was a sale of CCPC shares by the CCPC for cash from the purchaser’s self-directed locked-in RRSP account at Fortune, Dundee, Buckingham or an independent trustee, depending on Verbeek’s employment situation. We need not consider whether the loan transaction itself constituted a “trade” within the meaning of the Act.

[41] The CCPC share transactions constituted “distributions” of the shares in the respective CCPCs for each arrangement. We heard no evidence or submissions that the shares in the CCPCs had been previously issued.

[42] There was no evidence that a preliminary prospectus or prospectus was filed with respect to any of the arrangements or that any particular exemption was relied upon. Any trade would be contrary to section 53(1) of the Act in the absence of a prospectus exemption.

[43] An exemption is provided in sections 73(1)(a) and 35(2)(10) of the Act. When read together, the sections state that no prospectus is required for a distribution of securities of a private company where those securities are not offered for sale to the public. This prospectus exemption is not applicable to the circumstances of the arrangements, because the shares in the CCPCs were offered for sale to the public.

[44] The holders became involved in the arrangements by responding to newspapers advertisements.

[45] Elizabeth Williams, a holder who participated in an arrangement through the Tremblay Group, testified that she responded to a newspaper advertisement. Following a review of the documentary evidence produced by Staff we note that many holders who corresponded with Staff about their participation in the arrangements stated that they became aware of the arrangement through newspaper advertisements.

[46] Jean-Paul Belanger, an agent for Mr. Petrement, testified that he placed newspaper advertisements for the loan arrangements and that Verbeek’s office processed the paperwork for the arrangements. Jennifer Carbino, Verbeek’s administrative assistant, testified that she knew that Petrement, Tremblay, and Belanger had placed such ads. She testified that in May 1999, at Verbeek’s direction, she placed an order with the Ottawa Sun for an advertisement promoting a similar loan arrangement. The advertisement read:

[47] The advertisements offered some variant of the phrase “fast cash” or loan for locked-in RRSP holders but did not directly refer to CCPCs.

[48] Verbeek argues in his written submissions that the holders were ultimately interested in the loan, not the CCPC transaction; however, the CCPC transaction and loan were inextricably linked. The holder was obliged to purchase CCPC shares before being granted a loan, and the loan amount was tied to the purchase price of the CCPC shares.

[49] We find, therefore, that the newspaper advertisements offering loans effectively offered the shares of the CCPCs to the public. Accordingly, the prospectus exemption under sections 73(1)(a) and 35(2)(10) is not available.

[50] Verbeek has not persuaded us that any other prospectus exemptions were available.

Verbeek’s Role in the Arrangements

[51] There was no dispute about the mechanics of the arrangements, the contents of the CCPC package, or about how Verbeek’s office received or transferred the CCPC package.

[52] While Verbeek was registered with Fortune and Dundee, an NCAF was completed for each holder as part of the package of documents for the arrangement. We reviewed a number of such document packages submitted into evidence and have also reviewed Ms. Carbino’s evidence about the process. She identified some of the handwriting of the NCAFs as hers and the investment adviser’s signature on them as Verbeek’s. While Verbeek was not registered, no NCAFs were completed at the time of the CCPC share purchase transaction.

[53] Verbeek acted in a dual role: on behalf of the CCPC promoters involved in selling the CCPC shares, and on behalf of holders as their representative (registered representative in some cases).

[54] Verbeek’s participation in the CCPC share purchase transactions also falls within paragraph (c) of the definition of “trade” of section 1(1) of the Act: “any receipt by a registrant of an order to buy or sell a security”. The CCPC package of documents received by Verbeek contained a Letter of Direction to purchase CCPC shares. It was addressed to either Fortune or Dundee while Verbeek was registered with those firms. The letter was from a client, a person who had signed an NCAF that Verbeek also signed as the investment adviser. We find the letter of indemnity irrelevant to Verbeek’s role in the trade in these circumstances.

[55] While Verbeek’s involvement in the arrangements varied, based on whether he was registered or whether the group he dealt with was the Petrement or Tremblay Group, he was much more than a mere conduit as he suggests. He was a registrant who also provided administrative services in the course of an arrangement that required the holder (who had completed a NCAF) to purchase a security in order to obtain a loan.

[56] Verbeek’s submissions treat the sequence of steps in the arrangement as discrete sub-transactions. His submissions compartmentalize his role and responsibility in the steps. We do not accept that view. It is an artificial division that does not reflect the reality of his involvement.

[57] In any case, the Act defines a “trade” broadly and inclusively. It includes, in paragraph (e), “any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing.” It includes Verbeek’s role in the arrangements.

[58] For the reasons discussed, we find that Verbeek participated in an illegal distribution of the CCPC shares, contrary to section 53(1) of the Act.

2: Failure to Ascertain Suitability of the Investments

[59] Staff’s second allegation is that Verbeek failed to ascertain the general investment needs and objectives of his clients, the holders, and the suitability of the purchases or sales of the securities for his clients, and thus acted contrary to the public interest and contrary to section 1.5 of Commission Rule 31-505.

Staff’s Submissions

[60] Staff submits that Verbeek has admitted all of the facts necessary to establish this breach of Rule 31-505 in the Agreed Statement of Facts. He admitted he processed over 670 transactions but he only met with 8 investors involved with the Petrement Group and did not meet with any investors involved with the Tremblay Group. Although he did not meet with the vast majority of clients that were involved in the arrangement, nonetheless he acted as their registered representative and signed New Client Application Forms without knowing the circumstances of the particular client. Most of the clients did not have good investment knowledge and did not fit the high risk profile ascribed to them by Verbeek in the NCAFs.

[61] Verbeek opened a NCAF for every client and processed the trades. Staff submits he was indeed the “registered representative” in the transactions and he had an obligation to carry out his duties as a registered representative in these transactions.

Verbeek’s Submissions

[62] Verbeek argues that no registered representative was required to complete a CCPC transaction as it was an exempt transaction or administrative procedure carried out by the head offices of the registered dealers or by the trustees. He had no input in the transaction as a registered representative, and these parties received the administrative fee for transferring the locked-in RRSP accounts prior to the CCPC transaction.

[63] Verbeek submits that the CCPC package was all that was required for the trustee to process the transaction and effect the purchase of the shares of the CCPC. Verbeek claims that he was able to act as an administrative conduit even while unregistered. The trust companies did not require the participation of a registered representative. They carried out similar CCPC share purchases through Guy Petrement, without Verbeek’s involvement, before and after the material time.

[64] Verbeek submits that the NCAF was a mere formality to help open a registered account and to perform “trades” in that account (although, he submits again, the CCPC transaction was not a trade as defined in the Act). In the periods when he was registered, NCAFs were completed as directed by the dealers through which he was registered.

[65] Verbeek argues that his status as a branch manager during the material time is not relevant, because every CCPC transaction he was involved with was directed, supervised, and cleared by responsible parties. The transactions were overseen by the compliance departments of the brokerages through which he was registered, and they dictated the required investor profile and demanded a letter of indemnity addressed to Verbeek and the dealer. The CCPC transaction was also overseen by the compliance departments of the related or independent trust companies. They required certificates from accountants and lawyers stating the value of the CCPC shares and that these were qualified investments for a locked-in RRSP under the Income Tax Act. Such letters were included in CCPC package.

[66] Verbeek submits that the compliance departments of the dealers instructed him on completing a NCAF in the proper manner. Dundee required that holders fit an investment profile before it would allow CCPC transactions to be processed through it.

[67] Between May and September 2000, while he was not registered, Verbeek was involved in about 160 CCPC arrangements of the same structure as those that he participated in while registered at Fortune and Dundee. No NCAFs were completed during this time because none were required by a registrant. When Verbeek became registered through Buckingham, he asked clients to sign NCAFs, and many did do so. He requested them to do so, he claims, because he wanted to perform future transactions for these clients as their registered representative; however, Verbeek emphasized that he was not their registered representative during the CCPC transaction. Verbeek also notes that the clients also signed a letter of indemnity addressed to him even in the period when he was not registered.

Analysis

[68] Verbeek’s submissions and claims confirm that he was acting in a dual role, both for the CCPC promoters and for the holders, not that he was a conduit not acting for anyone.

[69] Registration is required to trade in securities. It is an essential element of the regulatory framework established to achieve the purposes of the Act. It serves as a gate-keeping mechanism which ensures that only properly qualified and suitable individuals are permitted to be registrants. The public is entitled to rely on the fact that anyone who acts as an adviser has satisfied the necessary proficiency and character requirements. See Gregory & Co. v. Quebec (Securities Commission), [1961] S.C.R. 584.

[70] We have found that Verbeek’s participation in some trading and distributing of CCPC shares was as a registered representative.

[71] The cornerstone of a registrant’s obligations is knowledge of the client’s investment objectives and the suitability of investments for the client. These are set out in section 1.5 of Ontario Securities Commission Rule 31-505, which states:

[72] The NCAFs used by the registered dealers in this matter allow the registrant to ascertain and record the client’s investment objectives, risk tolerance, and investment knowledge. The suitability of the proposed purchase or sale of a security can then be considered in relation to these factors.

[73] In a few instances, NCAFs were completed in Verbeek’s office. Ms. Carbino testified that she and Verbeek met personally with some holders and that some of them completed forms initially for the share purchase and transfer. Ms. Carbino met with 50 or 60 people and Verbeek himself met directly with 25 to 30 people.

[74] We are satisfied that Verbeek and Ms. Carbino did not meet or speak to the vast majority of the holders in the 670 arrangements in which Verbeek was involved. Ms. Carbino testified that Verbeek’s office provided a template or precedent NCAF form to the Petrement and Tremblay Groups for their salespeople to complete in meetings with holders. The precedent NCAF highlighted the information to be filled in by the holder. Verbeek’s office provided a hundred blank forms at a time in advance to the Petrement or Tremblay Groups.

[75] Ms. Carbino testified that Verbeek showed her how to fill out the NCAFs so that they could be processed by the dealers’ head office. The dealers required a client having investment objectives of 100% short-term capital appreciation/speculative trading, a high risk tolerance, and good investment knowledge.

[76] Mrs. Williams testified she signed the NCAF, but that it was completed by the salesperson who visited her. Her NCAF fits the above profile: Investment Objectives – 100% short-term capital appreciation/speculative trading; Client risk tolerance – 100% high; Investment knowledge ­– good. She testified she did not have good investment knowledge. She did not know the meaning of the terms investment objectives or risk tolerance, and these terms were not explained to her. She testified that she needed the loan to because she was not able to make mortgage payments on her home. Clearly Mrs. Williams did not fit the client profile ascribed to her.

[77] We find that Verbeek did not speak to Mrs. Williams about her NCAF. He signed Mrs. Williams’ NCAF, after the fact, as “I.A.” [“investment adviser”], just as he did for every other NCAF before us. In the case of Mrs. Williams, Verbeek violated section 1.5 of Rule 31-505. He failed to make enquiries about her investment needs and objectives, and the suitability of the CCPC transaction to her needs and risk tolerance.

[78] Verbeek submitted that the dealer’s compliance department dictated the client profile that would be acceptable for the CCPC transaction. He went through an NCAF in the evidence as an example. A holder’s NCAF with Dundee from February 2000 was completed as follows: Client Investment Objectives – 10% income, 10% long-term capital appreciation, and 80% short-term capital appreciation/speculative trading; Client risk tolerance – 10% medium, 90% high; Investment knowledge ­– limited. Dundee would not process this application and returned it to Verbeek’s office. The NCAF was amended to the following profile: Client Investment Objectives – 100% short-term capital appreciation/speculative trading; Client risk tolerance – 100% high; Investment knowledge ­– good. All changes were initialled by the holder; the NCAF was accepted and the CCPC transaction was processed through Dundee. Verbeek states that the Petrement and Tremblay Groups and their clients were told that the holders would have to fit that investor profile otherwise their forms would be sent back and the arrangement would be delayed.

[79] Instead of making enquiries to ensure that the high-risk CCPC share purchase suited the client’s investment profile, Verbeek altered the client’s investment profile to suit the high-risk investment. This was the antithesis of his obligations under Rule 31-505.

[80] Verbeek could not fulfil his obligations as registered representative under Rule 31-505 or as branch manager by directing the Petrement and Tremblay Groups without ensuring that holders had the proper investment profile to participate in the CCPC transaction. We heard no evidence that he made enquiries of any holders. Our review of the NCAFs indicates that most of the holders earned low incomes and had few if any investments outside of their locked-in RRSP or RRSP. Verbeek knew or ought to have known that client profiles listed in the NCAFs did not match the reality of the holders’ profiles. He ought to at least have made the enquiries required of him under Rule 31-505.

[81] Verbeek’s clients did not come to him asking to participate in the risky transaction. He was an integral part of an arrangement that funnelled clients into the CCPC transaction as a condition of the loan process. As Verbeek has stated, the clients were interested primarily in obtaining loans. Verbeek allowed the Petrement and Tremblay Groups to use his status and legitimize their scheme by passing it through registered dealers.

[82] We do not accept Verbeek’s arguments that he relied on the compliance departments of the registered dealers or of the trust companies. His breach of his obligations under Rule 31-505 makes such reliance unreasonable.

[83] In the circumstances of this case, where the client’s investment profile was altered or disregarded to effect the transaction, we do not accept that the letter of indemnity discharged Verbeek’s obligations under Rule 31-505.

[84] It is significant that he was a branch manager during this time. The branch manager holds a crucial role in compliance in the securities industry. In Re Mills (2000), 23 O.S.C.B. 6623, the Investment Dealer’s Association considered this point and held as follows:

[85] Registration is an essential element of the regulatory framework established to achieve the purposes of the Act. In determining whether a course of conduct is contrary to the public interest, we must look to these same purposes of the Act: (a) to provide protection to investors from unfair, improper or fraudulent practices; and (b) to foster fair and efficient capital markets and confidence in capital markets. Verbeek’s conduct as a registrant and a branch manager in these circumstances constitutes not only a breach of section 1.5 of Rule 31-505, but is such that it is also contrary to the public interest.

3. Verbeek’s Participation in the Scheme Being Contrary to the Public Interest

[86] Staff’s third allegation is that Verbeek acted contrary to the public interest, by participating in a scheme that involved the subsequent loan to the investor of approximately 65% of the CCPC share purchase price and an administration fee of 35% of the loan, requiring repayment of 100% of the loan with interest, and that he took advantage of people who were in dire straits, in a manner that resulted in a financial benefit to himself. This conduct is not becoming of a registrant.

Staff’s Submissions

[87] Staff submits that, in the Agreed Statement of Facts, Verbeek admits he knew that the investors who participated in this scheme were low income earners who became involved in these transactions because they were in financial difficulty and needed to access the funds in their locked-in RRSP.

[88] Verbeek was not acting merely as an administrative agent, as he claimed, but was dealing with the public, handled the public’s funds, and received orders to buy and sell securities.

[89] Between March 2000 and November 2000, Verbeek received approximately two million dollars from companies controlled by Guy Petrement and Jean Tremblay. This money flowed through foreign exchange accounts related to Verbeek at Jameson International (“Jameson”) before being deposited in the account of Bryden Investment Corp. (“Bryden”) in the Turks and Caicos Islands or other investment vehicles directed by Verbeek. Staff maintains that Bryden was Verbeek’s company or that, at the very least, Verbeek was involved with Bryden. This evidence shows that Verbeek received a payment from the Tremblay Group for his role in the arrangements which is clearly a commission for his efforts.

Verbeek’s Submissions

[90] With respect to the Petrement Group, Verbeek acknowledges that he or his assistant may have explained the loan to clients referred to him, but these clients were ultimately referred back to the Petrement Group if they intended to obtain a loan. He claims he was not involved in arranging, issuing or administering the loans, or deciding the percentage of funds charged as an administrative fee.

[91] Verbeek also relied on the fact that the compliance departments of the dealers and trustees processed the CCPC transactions with full knowledge that a loan was involved. He notes that many of the share certificates in the CCPC package examined by these departments contained statements that the corporation has a “lien on the shares represented by this certificate for any debt of the shareholder to the Corporation”.

[92] Verbeek further relied on the representations of the Petrement or Tremblay Groups, and their respective professional advisers, that the arrangements were legitimate.

[93] Verbeek denies that his participation in the arrangement was for his financial benefit, and denies he was compensated. He submits that the evidence adduced was insufficient to prove he was compensated for his administrative role in the arrangements. He characterizes the evidence of his direct compensation by the Tremblay Group as unreliable and submits it should be disregarded in favour of a letter from Jean Tremblay (which predates Tremblay’s examination under oath) which states, among other things, that Verbeek did not receive compensation for his role in the arrangements. Verbeek says that any payments received by Bryden from the Petrement or Tremblay Groups were private investments in Bryden, unrelated to his role in the arrangements.

(a) Verbeek’s knowledge of loans

[94] We find that Verbeek had knowledge at the material time that loans were involved in the arrangements and of the basic structure of the loans.

[95] Ms. Carbino testified that she or Verbeek explained the loans to holders who visited Verbeek’s office. She identified a document in her handwriting that was used to explain the loans to the holders, and she testified that Verbeek taught her how to explain the process and the numbers to use in the example. Verbeek admits that he explained the loan process to several holders involved in arrangements with the Petrement Group, but denies that he had knowledge that loans were involved in arrangements involving the Tremblay Group, as he understood the Tremblay Group arrangements involved dividends. He claims he terminated his relationship with the Tremblay Group following complaints from holders that they had not received the promised loans from the Tremblay Group.

[96] We do not find Verbeek’s evidence and submissions to be credible on this point. His involvement in arrangements with the Tremblay Group overlapped with those of the Petrement Group over a period of many months. He played a similar role in the arrangements of both groups. Prior to working with the Tremblay Group in December 1999, Verbeek knew that these arrangements were based on loans: he knew of the form of arrangements from his first involvement with Guy Petrement for a Mr. O’Connor in early 1998, and he placed at least one advertisement for loans in May 1999 (although he claims to have received no responses). We heard no other evidence to support Verbeek’s contention the Tremblay Group’s arrangements involved dividends.

[97] Mrs. Williams, who participated in an arrangement with the Tremblay Group, testified that the Tremblay Group salesperson referred her to Verbeek when she asked about the status of her loan and that she then spoke to Verbeek. Although Verbeek denied speaking to her, her testimony was not challenged successfully and we accept her evidence.

(b) Verbeek’s Knowledge of the Holders’ Circumstances

[98] We find that Verbeek was aware at the material time that the holders were unsophisticated investors who earned a low income and who required immediate access to cash, and he has admitted this in the Agreed Statement of Facts.

(c) Compensation

[99] We find that Verbeek received direct and indirect compensation for his participation in the arrangements.

[100] We heard conflicting and ambiguous evidence on this issue. Verbeek testified that he was not compensated for his participation in the arrangements. Jennifer Carbino testified that that the commissions he earned were based on mutual fund sales and a percentage of pre-authorized chequing plans sold to the holders, but was not aware of compensation connected to the CCPC transactions. Jean Paul Belanger testified that he received a commission of four to five percent from Guy Petrement, but he did not know whether Verbeek earned any commissions.

[101] Staff presented evidence of Verbeek’s direct compensation by the Tremblay Group. We were shown a series of documents indicating that Verbeek received a payment equal to 4% of the CCPC share purchase price.

[102] Rima Pilipavicius, senior forensic accountant in the enforcement branch of the Commission (“Enforcement”), testified that the Quebec Securities Commission (“CVMQ”) investigated Financiere Telco Inc. and CFM, the companies owned by Jean Tremblay that provided the loans in the arrangements involving the Tremblay Group. In May 2002, the CVMQ included Enforcement in its investigation. It provided Ms. Pilipavicius with documents that it had seized from the offices of the two companies. Included were documents titled “Honoraires & Remboursements”, or “Fees and Repayments” (the “Honoraires documents”), which provided some details on amounts transferred from holder’s RSP to purchase CCPC shares, related loan amount, fees charged, loan interest and principal repayments and a section on commissions.

[103] Ms. Pilipavicius reviewed the Honoraires documents during her testimony. In one example, the holder purchased 1477 shares in Edimax Technolgie, a Tremblay Group CCPC, for a total purchase price of $36,925. For this holder the Honoraries document showed the following:

[104] The effective interest paid by the holders would be significantly higher than the 5% annual rate shown in the calculation once we include the initial fees deducted and adjust the interest calculations to reflect the diminishing loan balance resulting from the monthly principal repayments.

[105] Staff submitted approximately 110 sheets of Honoraires documents. In 41 of them, “Verbeek” is explicitly shown receiving a 4% commission. Other sheets do not show a commission payable to “Verbeek”, but to “Courtier” (“broker”). Still others list “Dundee” instead of “Verbeek” or “Courtier”. Holders whose Honoraires sheets list commissions payable to “Dundee” or “Courtier” had all completed NCAFs signed by Verbeek. Staff submits that Verbeek received commission in all of these cases.

[106] Ms. Pilipavicius testified that she participated in an investigation interview of Jean Tremblay with the CVMQ on June 22, 2002. The transcript of this interview (the “Tremblay transcript”) was tendered into evidence in this hearing, and Ms. Pilipavicius was examined on it.

[107] We have reviewed the Tremblay transcript and the testimony relating to it. During the interview, Ms. Pilipavicius showed Mr. Tremblay one of the Honoraires document. Reading from it, Mr. Tremblay identified Verbeek as having received a commission of four percent. He said that the percentages were set beforehand, and that either he himself decided on the percentages “or it was a group decision.” He said that Verbeek acted as broker for the company, as others had before him. Verbeek participated in hundreds of transactions for the company in the year 2000 and would have earned a commission of 4% on total sales of approximately $10,000,000. He said that he created about 10 to 15 CCPCs, each of which had 49 clients. The money earned by the individual CCPCs in the Tremblay Group was invested in Telco.

[108] Verbeek argues that we should give the Honoraires documents no weight. The sheets are not dated. There is no indication about who prepared them or what information was used in their preparation. The set of sheets is also incomplete, in that one of the CCPCs in the Tremblay Group has no corresponding sheets. He accuses Staff of using false information in compiling summaries from the Honoraires documents.

[109] Verbeek also argues that we should give no weight to the transcript, other than the parts of it that would benefit his defence. He indicates several comments made by Mr. Tremblay about commission payments that are contradictory or vague. Mr. Tremblay could not explain one Honoraires document that listed Dundee as receiving a commission. Mr. Tremblay also contradicted himself by saying that some commissions to Verbeek were not paid. Verbeek argues that the statements in the transcript contradict the evidence of Ms. Carbino, that Verbeek received no commissions other than commissions from pre-authorized chequing plans from the remaining funds in the holders’ self-directed locked-in RRSPs following the CCPC transaction.

[110] Verbeek argues that the transcript should not be given any weight because he had no opportunity to cross-examine Mr. Tremblay and there is a risk of prejudice to him if we were to rely on the transcript. He argues that we should rely on a letter from Jean Tremblay that he entered into evidence (the “Tremblay letter”) instead of the transcript. The Tremblay letter is dated January 9, 2001 (before the evidence given under oath by Tremblay), is signed, is marked “Without Prejudice”, and is addressed to “Brian Verbeek and Whom Else it May Concern”. The letter states inter alia that Verbeek did not receive commissions.

[111] The Tremblay letter, the Honoraires documents, and the Tremblay transcript were admitted into evidence pursuant to section 15 of the SPPA, along with the other documentary evidence tendered by Staff and Verbeek. We accord these documents appropriate weight based on their reliability in the absence of cross examination and Verbeek’s submissions. The Honoraires documents, which were seized from Tremblay’s business premises by the CVMQ, are business records of the Tremblay Group arrangements which find generally reliable. Where there are contradictions in the contents of the Tremblay letter and the Tremblay transcript, we give greater weight to the Tremblay transcript, because it was made under conditions that give us greater assurances of its reliability.

[112] Having considered the evidence and submissions, we find that Verbeek received commissions for his role in the Tremblay Group arrangements. Similar direct evidence or submissions with respect to the Petrement Group of arrangements was not introduced.

[113] Staff did lead substantial evidence of payments made by several Petrement Group companies that were transferred through Canadian foreign exchange accounts related to Verbeek and, ultimately, to Bryden in the Turks and Caicos Islands. Scott Boyle, senior investigator with Enforcement, testified about his analysis of banking records, wire transfers, and other documents which were presented to us. Joy Stevenson, the Chief Financial Officer of Jameson International Foreign Exchange (“Jameson”), testified about the accounts related to Verbeek at Jameson and the transactions that related to those accounts. Ms. Carbino testified that she signed letters of direction, at the instruction of Verbeek, directing the flow of money into and out of those accounts and ultimately into the account of Bryden. She testified that Verbeek told her Bryden was established offshore because he was going through a divorce and he wanted to hide money from his wife.

[114] We also heard the evidence of Michael Smythe, CEO of a company called Impact Revenue Inc. Smythe testified that Verbeek agreed to purchase a 10% equity share in the company for US$500,000. Smythe opened an account at Jameson and received a wire transfer from Bryden as part payment for the shares. He also received from Verbeek part payment in the form of bank drafts from Petrement Group companies and cheques from Financiere-Telco Inc. of the Tremblay Group.

[115] We note that:

[117] We accept Staff’s extensive and detailed evidence with respect to the Jameson accounts, the payments of almost two million dollars made by Petrement Group companies that were transferred through them to the Bryden account, and the payments made by Bryden and the Petrement and Tremblay Group companies to Smythe.

[118] Verbeek admitted that funds did go through Jameson and that he directed those transfers to Bryden and other investments; however, he denied that he personally received any of the funds, or that the funds were related to his role in the arrangements.

[119] The evidence about Bryden itself was unclear. Verbeek testified that it is a mutual fund that he established through Temple Trust in the Turks and Caicos Islands in 1998. He named the company. He directed Bryden’s investments and stood to benefit from the performance of the investments by receiving 25 percent of all profits, but said he was not the beneficial or legal owner. He described, in general terms, some of the investments that Bryden had entered into and said that Bryden investors “lost their shirts”. Verbeek did not provide any documentary evidence about Bryden that could assist us to understand it further.

[120] We have insufficient evidence to make a finding about the exact nature of Bryden and its activities. We also have insufficient clear evidence that the payments made by the Petrement or Tremblay Group companies consisted entirely of the commissions made by Verbeek for his role in the arrangements. Furthermore, we are not confident that we have the complete picture of the payments received from the Petrement or Tremblay Groups to Bryden; we note, for example, the Petrement Group payments to Bryden are issued from only three of the Petrement Group companies listed in the Agreed Statement of Facts.

[121] We do have sufficient, cogent evidence to find that (a) Bryden received at least two million dollars through the Petrement and Tremblay Groups, (b) Verbeek was intimately related to Bryden at the material time and is still so related, and (c) Verbeek personally stood to receive substantial financial rewards from the investment of this money from the Petrement or Tremblay Groups. We consider this to be, at very least, indirect compensation to Verbeek, the quid pro quo for his participation in the arrangements.

[122] Accordingly, we find that Verbeek received direct compensation from the Tremblay Group and indirect compensation from both the Petrement and Tremblay Groups for his participation in the arrangements.

(d) Reliance

[123] We also do not accept Verbeek’s submissions on reliance. There was no evidence that the dealers who employed Verbeek or the independent trustees knew that a loan was made after the CCPC transaction. The notice printed on the share certificates in the CCPC package only gives notice of a lien on the shares in the event of a debt by the shareholder to the corporation. We do not find that it gives any notice to a dealer or trust company a private loan would follow the purchase of “qualified CCPC” shares within the self-directed RRSP.

[124] Ms. Carbino testified that Verbeek instructed her not tell the trust companies that loans were involved with the purchase of the CCPC shares. She testified that Verbeek “stated that it was a loophole through Revenue Canada that they probably wouldn't want to be involved with.” When Staff cross examined Verbeek on Ms. Carbino’s statement, he stated:

why would you want to involve the trust company in something that they would question as opposed to knowing that it was actually legitimate? If they asked questions, there would have been the prospect of perhaps losing the trustee. They may have chosen not to do business even though we would give them the comfort of having known that Revenue Canada has okayed this type of transaction.

1. he did not know that advertisements had been placed;
2. he did not know that the transactions involved loans to the investors; and
3. he had not received compensation for his involvement in these transactions.

1. advertisements had been placed in respect of the arrangements. He knew that the majority of holders became involved in the arrangements by answering advertisements placed in newspapers by the Petrement and Tremblay Groups. He placed advertisements for similar arrangements himself, though we have no evidence that anyone responded to these;
2. the arrangements involved loans to holders. As he submitted, the main purpose of the arrangements was to allow holders to receive a portion of the value of their locked-in RRSPs via a loan from the Petrement Group or the Tremblay Group; and
3. he had received compensation for his involvement in the arrangements. We have found that Verbeek was compensated by the Tremblay Group for his role in the arrangements. Even if we restrict his knowledge to compensation in this group of arrangements, we find Verbeek’s statement to Staff in 2001 at least misleading if not untrue.

1. participated in illegal distributions of securities, contrary to section 53(1) of the Securities Act, by trading securities for which there was no exemption available;
2. failed to ascertain the general investment needs and objectives of his clients and the suitability of the purchases or sales of the securities for his clients, and thus acted contrary to the public interest and contrary to section 1.5 of Ontario Securities Commission Rule 31-505;
3. acted contrary to the public interest by participating in the scheme that involved the subsequent loan to the investor of approximately 65% of the share purchase and by charging an administration fee to the investors of 35% of the loan proceeds;
4. acted contrary to the public interest by processing documents that referenced “Lafferty, Harwood and Partners Ltd.” without Lafferty’s knowledge and at a time when Verbeek was not registered through Lafferty; and
5. acted contrary to the public interest by making misleading or untrue representations to Staff on or about February 14, 2001 and February 22, 2001, in response to inquiries made by Staff during the investigation of this matter.