R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
MARK BONHAM, STRATEGICNOVA FUNDS
MANAGEMENT INC. AND BONHAM & CO. INC.
AMENDED SETTLEMENT AGREEMENT
1. By Amended Notice of Hearing dated November 6th, 2000 (the "Notice of Hearing") the Ontario Securities Commission (the "Commission') announced that it proposed to hold a hearing to consider whether, pursuant to sections 127(1) and 127.1 of the Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act"), it is in the public interest for the Commission to make an order that:
(a)the registration of Mark Bonham, StrategicNova Funds Management Inc. and Bonham & Co. Inc. (together referred to as the "Respondents") be suspended or restricted permanently or for such time as the Commission may direct;
(b)terms and conditions be imposed on the registrations of the Respondents;
(c)the Respondents cease trading in securities permanently or for such period as the Commission may direct;
(d)the Respondent, StrategicNova Funds Management Inc. submit to a review of its practices and procedures and institute such changes as may be ordered by the Commission;
(e)the Respondents be reprimanded;
(f)the Respondent, Mark Bonham be prohibited from becoming or acting as a director officer of an issuer;
(g)the Respondents pay the costs of the Commission's investigation;
(h)the Respondents pay the costs of the Commission's hearing; and
(i)contains such other terms and conditions as the Commission may deem appropriate;
II. JOINT SETTLEMENT RECOMMENDATION
2.Staff of the Commission ("Staff")agree to recommend settlement of the proceedings initiated in respect of the respondent StrategicNova Funds Management Inc. ("StrategicNova"), by the Amended Notice of Hearing dated November 6th, 2000 in accordance with the terms and conditions set out below. StrategicNova agrees to the settlement on the basis of the facts agreed to as hereinafter provided and StrategicNova consents to the making of an order in the form attached as Schedule "A" on the basis of the facts set out below.
3.This settlement agreement, including the attached Schedule "A" (collectively, the "Settlement Agreement"), will be released to the public only if and when the settlement is approved by the Commission.
III. STATEMENT OF FACTS
4.Staff and StrategicNova agree with the facts set out in this Part III.
5.SVC O'Donnell Fund Management Inc. ("SVC") was a corporation which during the period July 31, 1997 to June 30, 1998 (the "material time") was registered with the Commission as an Investment Counsel/Portfolio Manager.
6.On July 26, 2000, SVC formally changed its name to StrategicNova Funds Management Inc.
7.During the material time, Mark Bonham ("Bonham") was a significant shareholder of SVC and acted as the Portfolio Manager with respect to seven mutual funds managed by SVC. As well, Bonham was the Chief Executive Officer of SVC and related companies.
8.During the material time, Bonham manually priced certain shares held by three of the seven mutual funds that he managed for SVC.
9.SVC received a price feed from a third party source on a daily basis ("price feed"). The price feed contained end of the day share prices to be used in the valuation of SVC's mutual funds. SVC's accounting department highlighted items on the price feed if a) a share price on the computer price feed was 5% higher or lower than the previous day's closing price of the share or b) the computer price feed did not contain a price for the shares. Bonham would review the share prices as shown in the price feed and determine a value of certain of the shares based on his own discretion. Bonham did not apply a specific or consistent methodology in manually pricing shares and did not record or maintain any notes with respect to the determination of the manual price.
10.SVC was responsible for establishing policies when a valuation methodology other than share prices as shown in the daily price feed would be used for the shares held in the portfolio of the mutual funds.
11.The valuation of the mutual fund is used to calculate the net asset value per share ("NAVPS"). The NAVPS is used to determine the purchase and redemption prices that investors pay or receive. SVC did not have any written policies or procedures in place regarding the valuation of securities held in the mutual fund portfolios. SVC relied on Bonham to ensure that the day-to-day security valuation determinations were effected in an appropriate manner. SVC did not, during the material time, implement policies regarding internal controls in order to ensure asegregation of duties in the performance of the daily valuation of the mutual funds. There was no supervision or review of manual prices determined by Bonham.
12.Canada does not have a standard benchmark for materiality for regulatory reporting and/or client compensation. Staff have employed 0.5% of net asset value as the benchmark level for materiality, a benchmark used by member jurisdictions of IOSCO including France, the United Kingdom and the United States in determining standards for regulatory reporting and/or client compensation. The result of the manual pricing undertaken by Bonham with respect to each of the relevant mutual funds he managed based on such standard of materiality and during the material time is as follows:
(a)The Strategic Value Fund was overvalued (i.e. dollar difference as a percentage of net asset value per share) for 201 of the 231 trading days during the material time, and materially overstated between 0.52% and 4.2%.
(b)The Canadian Equity Value Fund was overvalued for 123 of the 231 trading days during the material time and materially overstated between 0.5% and 2.7%.
(c)The Dividend Fund was overvalued for 60 of the 231 trading days during the material time and materially overstated between 0.5% and 0.69%.
13.The estimated impact of the overvaluation was a) $64,519.64 as regards the Strategic Value Fund; b) $115,458.14 as regards the Canadian Equity Value Fund; and c) $197,674.92 as regards the Dividend Fund for the material time.
14.In approximately June of 1998, the issue of Bonham's manual pricing was the subject of a review performed by the compliance officer of SVC and the matter was ultimately referred to SVC's Audit Committee. The Audit Committee concluded that the manual pricing that had occurred was reasonable and consistent with what thefunds permitted. Subsequently, the Board of Directors decided that a formal procedure should be implemented with respect to manual pricing. The policy adopted was that as a general rule, manual pricing should not occur. A policy was adopted whereby on the exceptional occasions when a manual price was considered appropriate, the matter would be referred to the Chief Financial Officer and a portfolio manager (other than the portfolio manager raising the issue) to determine an appropriate manual price.
15.By June 2000, SVC and related companies were overdue in paying $28 million of bank credit facilities and lacked the ability to repay same. SVC and related companies were acquired by an arm's length third party and new management was put in place. Neither Bonham nor Bonham & Co. Inc. has any involvement in SVC, StrategicNova or related companies.
Conduct Contrary to the Public Interest
16.In failing to properly establish policies in respect to the valuation of securities held in its mutual fund portfolios and in failing to adequately supervise the practices detailed above by Bonham, SVC in its position of management of a mutual fund failed to act during the material time in the best interest of the mutual fund and failed to exercise the degree of care, diligence and skill during the material time that a reasonably prudent person would exercise in the circumstances, contrary to section 116(1) of the Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act") nd contrary to the public interest.
IV. TERMS OF SETTLEMENT
17.StrategicNova agrees to the following terms of settlement:
(a)StrategicNova will, on or before December 31, 2000, make payments of or otherwise credit $64,519.64 to the Strategic Value Fund, $115,458.14 to the Canadian Equity Value Fund and $197,674.92 to the Dividend Fund tocompensate for the overpayment made by investors to those funds during the material time;
(b)StrategicNova will, on or before December 31, 2000, make a payment of $50,000.00 to the Commission to be allocated to such third parties as the Commission may determine for purposes that will benefit investors in Ontario;
(c)StrategicNova will, on or before December 31, 2000, make a payment of $10,000.00 to the Commission as its contribution to the costs of the investigation and hearing of this matter;
(d)StrategicNova will submit to a review of the valuation practices and procedures involving the Strategic Value Fund, Canadian Equity Value Fund and Dividend Fund, such review to be performed by a third party (the "expert") approved by Staff at StrategicNova's expense and will implement such reasonable changes as are recommended by the expert in a report within reasonable time frames set out by the expert after consultation with StrategicNova. StrategicNova will provide Staff with a copy of the report and the recommendations of the expert and with progress reports concerning the implementation of the expert's recommendations;
(e)StrategicNova will submit to a review of the manual prices used in the calculation of net asset value per share for any day during the period July 1, 1998 to September 30, 2000 inclusive on which manual pricing occurred in any relevant mutual fund. Such review is to be carried out by the expert at StrategicNova's expense to determine whether the manual pricing activity that forms the basis of this proceeding was repeated during this time period. As part of this review StrategicNova agrees to produce to the expert at StrategicNova's expense, all of the manual pricing sheets for this period. If it is determined that SVC or StrategicNova engaged in this material and improper manual pricing activity during this period then the expert will determine the impact, if any, on SVC or StrategicNova's clients as a result of manual pricing. StrategicNova will provide Staff with a copy of the reviewcarried out by the expert;
(f)If, as a result of the reviews set out in paragraphs (d) and (e), it is determined that the fund values and/or published results, communicated either to the public or to individual clients, were materially misstated, then StrategicNova will recalculate such fund values and make any required restitution to any relevant mutual fund; and
(g)StrategicNova will be reprimanded.
V. STAFF COMMITMENT
18.If this Settlement Agreement is approved by the Commission, Staff will not initiate any complaint to the Commission or request the Commission to hold a hearing or issue any order in respect of any conduct or alleged conduct of SVC or StrategicNova in relation to the facts set out in Part III of this Settlement Agreement.
VI. PROCEDURE FOR APPROVAL OF SETTLEMENT
19.The approval of the settlement as set out in this Settlement Agreement shall be sought at a public hearing before the Commission scheduled for such date as is agreed to by Staff and StrategicNova in accordance with the procedures described herein and such further procedures as may be agreed upon between Staff and StrategicNova.
20.If this Settlement Agreement is approved by the Commission, it will constitute the entirety of the evidence to be submitted respecting StrategicNova in this matter and StrategicNova agrees to waive any right to a full hearing and appeal of this matter under the Act.
21.If this Settlement Agreement is approved by the Commission, the parties to this Settlement Agreement will not make any statement that is inconsistent with this Settlement Agreement.
22.If, at the conclusion of the settlement hearing, and for any reason whatsoever, this settlement is not approved by the Commission or an order in the form attached as Schedule "A" is not made by the Commission:
(a)this Settlement Agreement including all discussions and negotiations leading up to its presentation at a hearing, and all negotiations between Staff and counsel for StrategicNova concerning the matter of the terms of settlement proposed for StrategicNova, shall be without prejudice to Staff and to StrategicNova. Staff and StrategicNova will be entitled to all available proceedings, remedies and challenges, including proceeding to a hearing of the allegations in the Notice of Hearing and Statement of Allegations, unaffected by this agreement or the settlement negotiations;
(b)the terms of this settlement agreement will not be referred to in any subsequent proceeding, or disclosed to any person, except with the written consent of Staff and StrategicNova or as may be required by law; and
(c)StrategicNova agrees that it will not, in any proceeding, refer to or rely upon this settlement agreement or the negotiation or process of approval of this agreement as the basis for any attack on the Commission's jurisdiction, alleged bias, appearance of bias, alleged unfairness or any other remedies or challenges that may otherwise be available.
VII. DISCLOSURE OF AGREEMENT
23.Counsel for Staff or StrategicNova may refer to any part or all of this Settlement Agreement in the course of the hearing convened to consider this settlement agreement. Otherwise, this Settlement Agreement and its terms will be treated as confidential by all parties to the Settlement Agreement until approved by the Commission, and forever if, for any reason whatsoever, this settlement is not approved by the Commission.
24.Any obligation as to confidentiality shall terminate upon the approval of thisSettlement Agreement by the Commission.
VIII. EXECUTION OF SETTLEMENT AGREEMENT
25.This Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement and a facsimile copy of any signature shall be as effective as an original signature.
DATED November, 2000.