Proceedings

 

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

AND

IN THE MATTER OF
ANWAR HEIDARY AND JAMES E. SYLVESTER


Motion Hearing:
January 13, 2000

Panel:
John A. Geller, Q.C. - Vice-Chair
Morley P. Carscallen, FCA - Commissioner
R.Stephen Paddon, Q.C. - Commissioner

Counsel:
Alistair Crawley - For James E. Sylvester

Steven Graff - For Anwar Heidary

Melanie Sopinka - For the Staff of the Ontario Securities Commission

REASONS FOR DECISION ON MOTIONS

Nature of Proceedings

The proceedings in which these motions were brought were commenced by a Notice ofHearing dated September 7, 1999, in which the Commission was asked to considerwhether, pursuant to section 127(1) of the Securities Act (the "Act"), it is in the publicinterest for the Commission;

a) to make an order that Anwar Heidary and James E. Sylvester (collectively, the"Applicants") cease trading in securities, permanently or for such time as theCommission may direct;

b) to make an order that the Applicants be reprimanded; and/or

c) to make such other order as the Commission may deem appropriate;

by reason of the allegations set out in the Statement of Allegations of Staff of theEnforcement Branch of the Commission ("Staff") attached to the Notice of Motion.

The Statement of Allegations alleges, inter alia, the following.

1. Between November 1993 and September 1994, Anwar Heidary ("Heidary") sold toOntario investors securities of The Sussex Admiral Group Ltd. ("Sussex").

2. Between June 1993 and October 1994, James E. Sylvester ("Sylvester") sold toOntario investors securities of Sussex.

3. The sales of shares of Sussex constituted trades in securities of an issuer that hadnot been previously issued.

4. Sussex did not file a prospectus with the Commission and was never issued areceipt for a prospectus by the Commission.

5. Although the distribution of shares of Sussex purportedly relied on the "seedcapital" exemption from the prospectus requirements of the Act found in paragraph72(1)(p), the requirements of the exemption were not satisfied, and none of theother exemptions from the prospectus requirements in Ontario securities law wereavailable for the distribution of shares of Sussex.

6. Both Heidary and Sylvester held themselves out as engaging in the business oftrading in securities and were, therefore, "market intermediaries" as defined insection 204 of the regulation to the Act. To sell securities which relied upon the"seed capital" exemption from the prospectus requirements of the Act, Heidary andSylvester were required to be registered with the Commission to sell limited marketproducts, and neither Heidary nor Sylvester had this registration at the materialtime.

Staff's allegations included, in the case of Heidary, but not, in the case of Sylvester;

a) trading in previously unissued shares of 1149932 Ontario Inc. ("Ontario")without being registered with the Commission and with no availableexemption from the registration requirements of Ontario securities law;

b) trading in those shares without a prospectus being filed or receipted by theCommission and with no available exemption from the prospectusrequirements of Ontario securities law;

c) selling speculative securities of Sussex and Ontario to unsophisticatedinvestors and failing to assess the suitability of the investments to the needsof the investors; and

d) with the intention of effecting trades in shares of Sussex and Ontario,guaranteeing returns on investments in those shares to several investorsand promising unrealistic returns on an investment in shares of Ontario toother investors.

Staff further alleges that all such actions were contrary to the public interest.

Nature of the Motions

Sylvester applied to the Commission for an order quashing the Notice of Hearing anddismissing the proceedings against Sylvester. Heidary applied to the Commission for anorder quashing, in whole or in part, the Notice of Hearing and dismissing the proceedings,in whole or in part, against Heidary.

Basis of the Applications

The Applicants' motions were based on the argument that the breaches of Ontariosecurities law, alleged in the Statement of Allegations, all occurred outside the limitationperiod provided for in section 129.1 of the Act, which provided, at the time the Notice ofHearing was issued:

"Except where otherwise provided in this Act, no proceeding under this Actshall be commenced later than five years from the date of the occurrence ofthe last event on which the proceeding is based."

(The five year period was subsequently amended to a six year one by an amendmentwhich came into force following the issuance of the Notice of Hearing.) The five year rulewas enacted in 1994, and replaced a limitation period provision which was based on anentirely different approach. The provision in question in these motions has not beenpreviously interpreted by the Commission or the courts.

The first branch of the Applicants' arguments was a legal argument that, on a properinterpretation of section 129.1, all of the violations of Ontario securities law alleged byStaff occurred outside of the limitation period. The second branch was an argument that,on the facts of the case, no breach of Ontario securities law occurred within the limitationperiod. In accordance with Commission practice, we ruled that the second branch shouldbe dealt with at the conclusion of the hearing on the merits, and after all of the evidencewas in, so that we could deal with the complete factual record in reaching a decision.

Although we had some reservations about dealing with the first branch on preliminarymotions, we decided to do so because the argument was entirely a legal one, anddisposing of the matter now might conclude the matter as regards Sylvester, and narrowit as regards Heidary, so saving all parties time and expense.

Applicants' Arguments

Mr. Crawley, on behalf of Sylvester, argued that it would appear that the alleged breachesof the Act, as advanced by Staff, occurred prior to September 7, 1994, and so occurredoutside the limitation period. He submitted that one should look as a matter of substanceat when the material facts that the hearing is really based on took place, and determinea point of time at which the material facts are said to exist that give rise to a transgressionof the Act. There may be, he said, other things that happen that relate to the breach andthat are relevant to the breach, but, for the purposes of applying s. 129.1, those facts arenot the facts that constitute the last event on which the proceeding is based. In hissubmission, the concept of the last event upon which the proceedings is based should beinterpreted to mean the last material event because the expression "on which theproceeding is based" introduces the concept of materiality into the analysis, and thequestion is whether, if you took the alleged last event away, the proceedings would still beintact and whether the other facts necessary to advance the allegations would still bepresent.

Alternatively, Mr. Crawley argued that only the trades that occurred during the limitationperiod should be examined to determine whether there has been a breach of the Act, buttrades which occurred prior to the limitation period should not be considered.

Mr. Graff, on behalf of Heidary, adopted Mr. Crawley's submissions.

Staff's Arguments

Ms. Sopinka, on behalf of Staff, submitted that the Applicants' argument was that thelimitation period is to commence when the material facts of the first breach of the act wereestablished, and that this argument completely negated the meaning of "last event". Sheargued that each time one of the applicants traded in securities of Sussex, he breachedthe Act in at least two ways. First, he sold securities without registration. Second, hetraded in securities in an illegal distribution as no prospectus had been issued and therewas no available exemption. They were in the business of trading these securities to thepublic over a course of time. The individual breaches occurred within a continuing courseof conduct which subsumed individual breaches. In her submission, the term "the lastevent on which the proceeding is based" means the last time that the individual breachesoccurred, when the course of conduct ended.

Ms. Sopinka pointed out that proceedings before the Commission are not always basedon breaches of the Act, and that in many cases proceedings are commenced under thepublic interest jurisdiction of the Commission, and there is no determination of when abreach occurred.

In response to a question from Commissioner Carscallen, Ms. Sopinka acknowledged thatit would be necessary for there to be some commonality among the conduct for there tobe a course of conduct of the type she was referring to, and that it would be incumbent onStaff to show such commonality.

Analysis of Arguments

The sanctions requested in the Notice of Motion are provided for in subsection 127(1) ofthe Act, the introductory portion of which reads as follows:

"The Commission may make one or more of the following orders if in itsopinion it is in the public interest to make the order or orders".

It is not necessary for the Commission to find that a respondent has breached Ontariosecurities law as the basis for the making of such an order. (See In the Matter of CanadianTire Corporation Limited (1987), 10 OSCB 857, affirmed (1987), 10 OSCB 1772 (DivisionalCourt), leave to appeal refused [1987] 35 B.L.R. note xx (Court of Appeal).

The decision which the Commission must arrive at in determining whether a subsection127(1) order should be made is not whether a provision of Ontario securities law has beenbreached, but, rather, whether, on the basis of the evidence, it is in the public interest toimpose the sanction.

Against this background, it is a respondent's course of conduct, and not specific breachesof Ontario securities law, which is determinative, although, of course, specific breacheswill no doubt be a consideration, in appropriate cases, to be taken into account by theCommission. It will normally be the course of conduct on which the proceeding will bebased. A course of conduct for this purpose could be a single act, and one which was notnecessarily a breach of Ontario securities law.

So, in determining what constitutes "the occurrence of the last event on which theproceeding is based", it will normally be necessary to look at the course of conduct of therespondent, as alleged by Staff and proved in evidence, and to determine just what is thelast event in the course of conduct alleged and proved.

When the first breach occurred in a series of breaches of Ontario securities law is not, asargued by the Applicants, the touchstone. Nor, if some breaches in a series of breachesoccurred before, and some during, the limitation period, is it appropriate to proceed onlywith respect to those breaches which occurred during the limitation period. Indeed, someor all of the "events" alleged and proved may not, as we have said, be breaches of Ontariosecurities law at all.

Rather, "the last event on which the proceeding is based" referred to in section 129.1 ofthe Act is the last event in the series of events which form the course of conduct on thebasis of which subsection 127(1) sanctions are requested by Staff.

It may be that some of the "events" alleged by Staff in a proceeding may not, on theevidence, be such as to form part of a course of conduct, but, rather, may be entirelyunrelated. In such a case, those events could not be properly used to bring the course ofconduct within the limitation period. This could normally only be decided after hearing theevidence in the hearing on the merits.

Decision

As a result, at the completion of the hearing on the Applicants' motions, we dismissedthem, without prejudice to the Applicants' right to renew an application at the conclusionof the hearing on the merits as to particular events which should or should not be takeninto account by the Commission in deciding just what the limitation period was in theseproceedings.

February 8th, 2000.

"J. A. Geller"
"Morley P. Carscallen"
"R. Stephen Paddon"