R.S.O. 1990, c. S.5, AS AMENDED



September 27, 1999

John A. Geller, QC - Vice-Chair
Morley P. Carscallen, FCA - Commissioner
Kerry D. Adams - Commissioner

For the Staff of the Ontario Securities Commission
Kate Wootton



These proceedings were commenced by Notice of Hearing dated September 23, 1999, inwhich the staff ("Staff") of the Commission asked the Commission to make an order thatthe registration of the Respondent be terminated or suspended or restricted for suchperiod as the Commission may order or that additional terms and conditions be imposedon the Respondent's registration or that the Respondent be reprimanded.

In support of this request, Staff made the following allegations:

1. The respondent, Noram Capital Management, Inc. ("Noram" or the "Respondent")is a corporation registered pursuant to Ontario securities law as an adviser,investment counsel portfolio manager.

2. Section 139 of the Regulation (the "Regulation") under the Securities Act (the "Act")provides that every adviser shall deliver to the Commission, within ninety days afterthe end of its financial year, a copy of its audited financial statements for thefinancial year.

3. Pursuant to section 107 of the Regulation, Noram is required at all times to maintaina prescribed amount of minimum free capital.

4. Noram's audited financial statements for the year ending June 30, 1998 werereceived late at the Commission on November 10, 1998. A note to the financialstatements indicated that subsequent to Noram's year end, $520,000 had beeninjected into Noram through an issuance of shares.

5. A calculation of Noram's minimum free capital disclosed a deficiency in the amountof $829,561. Accordingly, Noram was not in compliance with its obligation to meetits minimum free capital requirements under Ontario securities law.

6. By November 17, 1998, Staff had been provided with two bank deposit slips whichindicated that $830,000 had been deposited to the account of Noram. Staff,however, required evidence of the issuance of shares to Mr. Willman (the Presidentof Noram) and copies of the personal loan agreements, in order to be satisfied thatthe capital deficiency had been rectified.

7. By letter dated November 20, 1998, Staff formally advised Noram that it wasdeficient in meeting its minimum capital requirement by $829,561 as its year endof June 30, 1998. Staff acknowledged that it was aware that financingarrangements were being made to provide the required capital to Noram. Staffrequested documentation evidencing the capital injection, including a copy of thenewly issued common share certificates and a copy of the personal loan agreement(s). In addition to specific auditing requirements, Staff placed Noram on monthlycapital monitoring effective the month ending November 30, 1998. This requiredNoram to submit the following to the Commission no later than three weeks aftermonth end (the "Monthly Reporting"):

a) unaudited, interim financial statements at month end prepared in accordancewith Generally Accepted Accounting Principles ("GAAP"); and

b) a calculation of minimum required capital at month end.

8. By letter dated December 3, 1998, Staff formally notified Noram of its intention toimpose conditions of registration on Noram, pursuant to section 105 of theRegulation, in accordance with the terms and conditions set out in its letter datedNovember 20, 1998 (the "Terms and Conditions").

9. The Terms and Conditions of registration were accepted by Noram on December14, 1998.

10. On December 3, 1998, Staff received copies of the documentation evidencing theissuance of 830,000 common shares of the capital stock of Noram to Mr. Willmanin consideration for $830,000. The documentation provided by Noram alsoindicated that Noram had purchased a mutual fund [sic] from the Royal Bank in theamount of $830,000 (the "Mutual Fund").

11. On December 28, 1998, Staff received a copy of Noram's unaudited interimfinancial statements for the period ended November 30, 1998. A calculation ofNoram's minimum free capital disclosed a deficiency in the amount of $538.

12. On January 5, 1999, Noram provided documentation establishing that it hadrectified its capital deficiency.

13. The Monthly Reportings for the period November, 1998 to May, 1999 disclosed nocapital deficiency.

14. By letter dated July 5, 1999, Staff advised Noram that a Personal Property SecurityAct search identified five claims for liens against the assets of Noram (the "PPSAClaims"). Staff requested that Noram provide documentation identifying the natureof the PPSA Claims.

15. The Monthly Reporting for the period ended June 30, 1999, received at theCommission on July 23, 1999, revealed that Noram had a working capital deficiencyin the amount of $933,909. The Monthly Reporting enclosed a copy of Noram'sletter of July 20, 1999 advising that it was taking steps to rectify its working capitaldeficiency by dissolving its health and welfare trust. Noram did not, however,respond to Staff's inquiries regarding the PPSA Claims and has not done so todate.

16. As of June 30, 1999, Noram was capital deficient in the amount of $948,909.

17. Noram's Monthly Reporting for the month ended July 31, 1999 again revealed aworking capital deficiency in the amount of $927,974.

18. As of July 31, 1999, Noram was capital deficient in the amount of $942,974.

19. By letter dated August 26, 1999, Staff advised Noram that it had a capital deficiencyin the amount of $948,909 as at July 31, 1999. Noram was requested to rectify thedeficiency by the close of business on Monday August 30, 1999, failing which stepswould be taken to suspend Noram's registration. Noram did not rectify thedeficiency as requested.

20. On or around September 10, 1999, Staff received loan documentation (the "LoanDocumentation") from Noram which establishes that Noram guaranteed the Loanof Mr. Willman from the Royal Bank, pursuant to a Guarantee and Postponementof Claim, and that Noram granted a security interest in and a pledge of the MutualFund, and income from the Mutual Fund, to the Royal Bank pursuant to a Securityand Pledge Agreement.

21. The Loan Documentation establishes that Noram does not have control over accessto the $830,000 Mutual Fund or any income from that Mutual Fund. Control overaccess to the benefits of an asset is one of the essential characteristics of an asset.Accordingly, the Mutual Fund does not qualify as an asset under GAAP.

22. As a result of Noram failing to take into account the impact of the LoanDocumentation on its capital, Noram's minimum free capital has been overstatedsince June, 1998, creating a misleading impression as to Noram's financialcondition. Noram has therefore had deficiencies in its minimum free capital inamounts ranging up to $948,909 since June, 1998 to date. The Monthly Reportingssince November 1998 are therefore misstated and not prepared in accordance withthe Terms and Conditions of Noram's registration.

23. As at July 31, 1999, Noram was deficient in its obligations to meet minimum capitalrequirements under Ontario securities law in the amount of $948,909. In addition,Noram has been capital deficient since June 30, 1998 in the amount of at least$829,561.

24. The conduct of Noram in failing to meet minimum capital requirements and in failingto abide by its Terms and Conditions of Registration is contrary to the publicinterest.

Staff Evidence

Staff did not call any witnesses. Instead, Staff filed as Exhibits two certificates made bya Director (as defined in the Act) of the Commission. Under section 139 of the Act, suchcertificates are admissible in evidence, so far as relevant, for all purposes in any action,proceeding or prosecution insofar as they relate to certain specified matters. The factualmatters certified in such certificates came within the matters specified in the section.

The two section 139 certificates, and the documents certified by them, established thefollowing facts.

Noram is registered with the Commission as an investment counsel and portfolio manager.Its audited financial statements for its financial year ended June 30, 1998 disclosed thatit was deficient in meeting its capital requirements by $829,561. As a result of this capitaldeficiency, the Director imposed terms and conditions on Noram's registration. By letterdated December 3, 1998, Noram was advised of the intention to impose these terms andconditions. By letter dated December 14, 1998 and signed by Andrew Willman("Willman"), Noram's President, Noram accepted these terms and conditions. One ofthese terms and conditions required Noram to file with Staff on a monthly basis, effectivewith the month ending November 30, 1998, both interim financial statements at each monthend prepared in accordance with GAAP and a calculation of minimum required capital atmonth end prepared in a specified format. The required material was to be submitted toStaff no later than three weeks after month end.

Noram purported to rectify its capital deficiency in the following manner. Willman obtainedtwo personal loans from the Royal Bank of Canada (the "Bank") totalling $830,000, andon November 26, 1998 purchased from Noram for that amount 830,000 common sharesof Noram. On November 4, 1998 and November 13, 1998 Noram invested the $830,000received by it from Willman in respect of the share issuance in the Bank's Royal PremiumMoney Market Fund ($520,000 on the earlier date and $310,000 on the later date). Thesetransactions appeared to remedy the capital deficiency, and the monthly financialstatements and calculations of minimum required capital of Noram received by Staff fromNoram or its accountants as at the month-ends from and including November 30, 1998through May 31, 1999 were prepared on the basis that Noram's interest in the Bank fundwas an unencumbered asset.

By letter dated July 5, 1999, Staff advised Noram that, as a result of a personal propertysecurity search, it had come to Staff's attention that there were three security interests heldby the Bank with respect to Noram, and two security interests held by other creditors.Noram was asked to supply by July 19, 1999 a copy of the security agreement betweenNoram and the secured party, and a brief description of the collateral, for each claim.

On July 23, 1999, Staff received Noram's monthly reporting for the month ended June 30,1999. The working capital calculation disclosed a capital deficiency of $933,909. Itindicated that the $830,000 Bank fund interest which had been purchased by Noram wasan encumbered asset, and that amount was deducted from the calculation of currentassets. The working capital calculation for the month ended July 31, 1999 showed aworking capital deficiency of $927,974.

With a letter from Noram dated September 10, 1999, Staff received documentationestablishing that on November 4, 1999 (the date on which Noram purchased a $520,000interests in the Bank fund), Noram guaranteed Willman's indebtedness of $520,000 to theBank, and on November 13, 1998 (the date on which Noram purchased a $310,000interest in the Bank fund), Noram guaranteed Willman's indebtedness of $310,000 to theBank. In each case, Noram granted a security interest in and pledge of the Bank fundinterest to the Bank to secure its guarantee.

At the date of the hearing, Staff had not received Noram's monthly reporting for the monthended August 31, 1999.

Noram has been operating with a working capital deficiency since June 30, 1998. Duringthe entire period, it was in default of its obligations under section 107 of the Regulation tomaintain the prescribed amount of minimum free capital.

Respondent's Evidence

Noram was not represented by counsel at the hearing. It was represented by Willman, itsPresident, chief executive officer, trading officer and director, investment counsel portfoliomanager, supervisory procedures officer and branch manager.

Willman, on behalf of Noram, called three witnesses David Weyman, Jerry Lewkowicz andhimself.

Mr. Weyman is with Law Chambers Group Inc., consultants to Noram's Health and WelfareInsurance Plan and Trust (the "Trust"). He testified that the Trust was put into place June30, 1997, and, based on its original level of benefits, required funding of approximately$1,750,000, and that $650,000 was paid into the Trust on June 30, 1997 or shortlythereafter. That left outstanding $1,100,000 owed by Noram to the Trust. This hasremained a liability of Noram up to the present time.

Recently, it was suggested that the benefits under the Trust be reduced to a level lowenough that the additional $1,100,000 would no longer be required, and this was done,effective on August 23, 1999, by an amendment of the Trust. As a result, there is a smallsurplus in the Trust, which will ensure that no further contributions are required in thecurrent year, or are likely to be required in the foreseeable future.

Mr. Weyman then went on to deal with the tax treatment of the elimination of theindebtedness to the Trust. He said that the real issue was whether the elimination of theliability was on capital or income account. He said that he believed Noram had "anarguable position and a filing position for filing with Revenue Canada, to take the positionthat the forgiveness of this debt of 1,100,000 is on capital account. But as with allsituations where income versus capital is in question vis-a-vis Revenue Canada and thetax treatment, there is always doubt." He went on to say that "From a purely accountingpoint of view, I certainly could not give any assurance that it would be treated as a capitalitem in the final analysis", and that "the bottom line effect on the income statement of thecompany is likely to be perhaps somewhere in the order of net of tax, somewhere in theorder of 600 - or $650,000, presumably about 57% of 1,100,000 which is somewhat justover 600,000 -, $620,000, and the difference between the 1,100,000 and the 620,000, ifthat is the exact number, is the tax effect in the financial statements of the company thatwill need to be recognized because of the uncertainty and the degree of uncertaintysurrounding the income tax consequence of this debt being forgiven."

Mr. Lewkowicz is a chartered accountant, practising with Feldstein and Associates LLP,Noram's auditors.

Mr. Lewkowicz testified that "At no point in time was I advised that the money within thecompany that was invested in this mutual fund, the money market fund, in fact had beenpledged for an outside loan. In fact, I wasn't aware of that until I was advised by the[Commission].", so that in preparing Noram's monthly statements he had no idea that theassets were overstated. "Had I been advised, the - the financial statement may betantamount to false and misleading. Without it reflecting certain assets, they clearly werenot free to be used by the company. That's precisely why as soon as I was advised, anysubsequent financial statements have in fact accounted for that."

He went on to say that had he been aware of the situation, the indebtedness to the Trustwould have been dealt with at an earlier date.

Mr. Lewkowicz went on to confirm that, because for accounting purposes one of the majorconcepts is one of conservatism, an accountant has an obligation to provide for anycontingent liabilities to their fullest, and that in preparing the financial statements forAugust, he has assumed that the "dissolution of the debt of 1,100,000 will be taxed atabsolutely full rates. It may. It may not. But the financial statement in fact are providingfor its fullest."

He said further "As a result of this very large tax liability, there is still a deficiency becauseand only because of the tax liability. Discussions have taken place earlier this morningabout how we in fact can correct the deficiency, and I believe that measures are in placethat will pretty well eliminate it."

Mr. Lewkowicz confirmed that he had never advised Willman that the pledge of the Bankfund interest was not to be treated as a reduction of the asset for the calculation of workingcapital.

Willman testified that, in connection with the Bank transactions "we simply rely on their [ie:the Bank's] suggestions, what is the most expedient way of dealing with the matter, andthe account manager advised us that this is probably the most agreeable and weproceeded on that basis. I don't believe we really had any discussion with Mr. Lewkowiczabout the treatment. It simply had no care to us."

In answer to a question from Commissioner Carscallen, Willman said "But our convictionall along have been that we are dealing with professional advisors who simply are licencedin this province to conduct - and simply we didn't feel it was appropriate to second guessopinion, whether a loan officer or accountant who we have long-term working relationshipand we assume that the accountant and the auditor is sufficiently verse with therequirements of the Securities Act under which we are registered under."

He also said "We are dealing with McCarthy Tetrault as our legal advisor on securitiesmatter. Well, we are learning a lot of things continuously on our own because they do notprovide, for instance, sufficient guidance on some of the matters. So again I am the lastperson to try to point shortcomings of various professionals but the reality is yes, ultimatelyI must accept responsibility for any shortcomings but I intend to very much reassure you,sir, that it was totally, I would say, unintentional and the intent of being compliant at anygiven time and serving the interest of investors in any unencumbered way always beenupper most in our mind. It is simply a matter of certain technicalities which I admit."

Willman said, in answer to a question from the Vice-Chair that it had never occurred to himthat there was some problems in describing the Bank fund interest as being worth 100cents on the dollar, despite its pledging, and that the bank loan officer had advised himthat under the circumstances it could be shown as a working capital asset at 100 cents onthe dollar. He could not, however, remember the name of the officer.

Respondent's Argument

Willman argued that Noram did not have any external debt. When asked by the Vice-Chair whether Noram's guarantee of the Bank's loan to Willman did not constitute externaldebt, Willman said:

"Sir, I have really no opinion. I am not an accountant per training and clearly theintricacies of this somewhat lose me. I'm sorry. I understand the significance ofthat but we, at all material times, we have been relying on the guidance of taxlawyers, largest legal firm, accounting firm and we simply felt that we receivedsufficient guidance in the matters. If there was some, lots [sic] of communication,perhaps in carrying the discussion to a very specific end, obviously we acceptblame for this, but I assure you that this was unintentional under anycircumstances."

He went on to say:

"We've been consulting all people with recognized standing in the field and forwhatever reasons, either we didn't get proper advice or we simply been unaware,and that's really, I beg to say, that's the bottom line."

Willman argued that no interest of investors were endangered by Noram's lack of capital."We consider this however regrettable matter pretty much an internal issue." Noram, heargued, did not require significant capital because it did not handle client funds.

He went on to argue that Noram had particular expertise with respect to convertiblesecurities, and any suspension of its registration would "jeopardize investment interestsof many investors".

Finally, Mr. Willman argued:

"I would very much like to reiterate the point that we sincerely believe that we havelet down by our professional advisors and we should not be held liable foressentially poor professional advice."

Findings of Fact

In our view Staff has proved the factual allegations made by it in all material respects.Noram has, and has had since, at least, June 30, 1998, a very substantial working capitaldeficiency. It is, and has been since, at least, that date, in breach of its obligations undersection 107 of the Regulation to at all times maintain a prescribed amount of minimum freecapital.

As regards Willman's oft-repeated claim that Noram had no idea that it was offside on theminimum free capital requirement, and that it was all the fault of Noram's professionaladvisors, we find this assertion to be incredible.

We believe Mr. Lewkowicz's statements that he was not told of the "ring round the rosy"(our words, not his) "investment" by Willman in Noram, and that he had no question thatit did not have the desired effect of increasing Noram's working capital.

Willman told us that he relied on the advice (accounting advise, presumably) of a Bankloan officer, whose name he could not remember. We do not believe that a bank loanofficer would have been likely to give such advice or, if he did, that Willman would haveaccepted and acted on it. Willman told us that he himself had no idea that thisarrangement, which in our view was nothing more than a smokescreen, did not have theeffect of increasing Noram's working capital. We do not believe this.

Willman told us that he had been registered with the Commission as an investmentcounsel for nearly 30 years. He also held himself out as a self-proclaimed expert onconvertible securities, with respect to which risk analysis is important. We find it incrediblethat a registrant with almost 30 years experience as an investment counsel, and an experton convertible securities, would not have appreciated that the arrangement was no morethan a smokescreen, and would believe that it would in fact increase working capital foraccounting purposes. His failure to disclose Noram's guarantee and pledge to Mr.Lewkowicz supports, in our view, this conclusion.

We can only speculate as to why Willman was prepared to engage in such a deception.It may be that he was hoping that by the time the deception was discovered, Noram'sfinancial condition would have improved, and it would be skated on side. Desperatepeople sometime take desperate measures. Whatever the reasons may have been, weare satisfied that Willman's explanation is not plausible.

Similarly, his repeated attempts, both in his evidence and in his argument, to cast theblame on his professional advisors were difficult to accept.

Staff's Argument

Ms. Wootton submitted that the appropriate penalty in the circumstances of this case wassuspension of Noram's registration. She argued that failure of a registrant to comply withits minimum free capital requirement was a serious matter, the capital requirements set outin the Regulation being intended to ensure that a registrant had sufficient funds in itsbusiness so that it was solvent even in the face of market fluctuations and that itscustomers could be paid any amounts to which they were entitled without delay, includingany amounts that might be owing to satisfy judgments obtained against the registrant fornegligence or breach of duty.

She argued further that the fact that Noram has been capital deficient for over a year wasan aggravating factor, and the amount of the deficiency was significant. She submittedthat the risk of harm to Noram's clients and the danger of insolvency has been andcontinues to be significant.

She further argued that failure to comply with obligations under Ontario securities law ona persistent basis went to the very heart of whether the privilege of registration should becontinued without the imposition of "a strict penalty for specific deterrent purposes."

Finally, she argued that although no harm had been suffered by any of Noram's clients,to protect the public interest against the possibility of injury is one of the most significantpurposes of Ontario securities legislation.

She asked us to suspend Noram's registration for three months and that, in addition, afurther term and condition should be imposed on Noram's registration requiring it toundergo a review of its practices and procedures by an independent third party at Noram'sexpense to ensure that Noram will operate in compliance with Ontario securities law oncethe suspension ends, with the suspension to remain in effect until the latest of the expiryof three months, the date on which changes recommended by the review are implementedby Noram, and the date on which Noram's regulatory capital deficiency is corrected. Shealso asked that Noram be required to send a letter to each of its customers advising of thesuspension and recommending that they make alternate arrangements with respect to theirinvestment portfolio, and a letter to its broker advising of the suspension.


There is no question that failure of a registrant to meet its minimum free capitalrequirements is a serious matter, failure to do so for a protracted period is an even moreserious one, and supplying false and misleading financial statements to Staff to concealthe failures is very serious indeed.

We do not accept Willman's argument that no interests of investors were endangered byNoram's lack of capital, and that Noram did not require significant capital because it didnot handle client funds. There is always a danger that a registrant that is in financialdifficulty will be more inclined to cut regulatory and legal corners in order to stay inbusiness. Indeed, this appears to us to be what has happened in this case. We mustconcern ourselves not only with actual harm to investors, but also with potential harm.

In proceedings of this sort, it is not our function to punish a registrant, but it is our functionto impose such sanctions, if any, as we consider necessary to protect the marketplace andinvestors from a repetition of the improper conduct which we find to have been engagedin by the registrant.

Willman testified that he is the sole registrant employed by Noram. Indeed, on theevidence, he seems to be Noram for all practical purposes. As a result, we do not feel thata review of Noram's procedures will serve any useful purpose. The problems which existin Noram do not seem to us to be the sort which would be cured by improving Noram'sprocedures.

Rather, on the evidence, it seems clear to us that the delivery to Staff of false andmisleading financial statements was an intentional act of Willman.

We considered whether revocation, rather than suspension, of Noram's registration mightbe the proper sanction in these circumstances. However, we concluded that it was notnecessary to go that far in this case in order to protect the marketplace. We concludedthat, once it is established by audited financial statements that Noram had made good itsregulatory capital deficiency, and after an appropriate period of suspension to recognizethe seriousness of Noram's actions and serve both as a deterrent to Noram and as ageneral deterrent, it would be sufficient to impose additional terms and conditions onNoram's registration requiring quarterly financial statements and working capitalcalculations, with a review report by Noram's auditors, as well as continuing in effect themonthly statement and calculation requirements for the other months of the year.

We concluded that a minimum six month suspension was required.

We have some doubt that Noram will be able to meet its regulatory capital requirements.It may be that, as a result of the suspension, and our findings, Noram's customers will goelsewhere, thus exacerbating Noram's financial condition. The result may be to put Noramout of business. However, in light of the seriousness with which we regard Noram'sactions, we are of the view that no lesser sanction will suffice.

Accordingly, we made the order which appears as the Schedule to these Reasons.

October 19, 1999.

"J. A. Geller"
"Morley P. Carscallen"
"K. D. Adams"