Settlement Agreement: In the Matter of Noram Capital Management, Inc., and Andrew Willman
IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED
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IN THE MATTER OF NORAM CAPITAL MANAGEMENT, INC.,
AND ANDREW WILLMAN
SETTLEMENT AGREEMENT
I. INTRODUCTION
1.By notice of hearing dated July 7, 2000 (the "Notice of Hearing"), the Ontario Securities Commission (the "Commission") announced that it proposed to hold a hearing to consider:
(a)whether it is in the public interest for the Commission to make an order:
(i)pursuant to subsection 127(1), clause 1, that the registration of Noram Capital Management, Inc. ("Noram") be terminated for such period as the Commission may order or that additional terms and conditions be imposed on Noram's registration;
(ii)pursuant to subsection 127(1), clause 1, that the registration of Andrew Willman ("Willman") be terminated or suspended or restricted for such period as the Commission may order or that additional terms and conditions be imposed on their registration;
(iii)pursuant to subsection 127(1), clause 2, that trading in any securities by Willman cease permanently or for such period as the Commission may order;
(iv)pursuant to subsection 127(1), clause 3, that the exemptions contained in Ontario securities law do not apply to Willman permanently or for such period as the Commission may order;
(v)pursuant to subsection 127(1), clause 7, that Willman resign his position as a director and/or officer of Noram;
(vi)pursuant to subsection 127(1), clause 8, that Willman is prohibited from becoming or acting as a director or officer of any issuer;
(vii)pursuant to subsection 127(1), clause 6, that Noram and Willman bereprimanded;
(viii)pursuant to subsection 127.1(1) and (2), that Noram and Willman or any of them, pay the costs of Staff's investigation and this proceeding; and/or
(ix)to make such other order as the Commission may deem appropriate.
II.JOINT SETTLEMENT RECOMMENDATION
2.Staff of the Commission ("Staff") agree to recommend settlement of the proceeding initiated in respect of the respondents Noram and Willman (together referred to as the " Respondents") by the Notice of Hearing in accordance with the terms and conditions set out below. The Respondents consent to the making of an order against them in the form attached as Schedule "A" on the basis of the facts set out below.
III.STATEMENT OF FACTS
Acknowledgment
3.For the purposes of this proceeding, and of any other proceeding commenced by a securities regulatory agency in Canada, the Respondents agree with the facts set out in this Part III.
Facts
4.Noram is and was at all material times, registered with the Commission as an investment counsel portfolio manager pursuant to Ontario securities law. Noram's registration is currently suspended by Order of the Commission dated September 29, 1999 (the "Order"), details of which are more fully described below in paragraphs 14-25.
5.Willman is, and was, at all material times:
(a) registered with the Commission as an investment counsel portfolio manager pursuant to Ontario securities law;
(b)the only registrant employed by Noram;
(c)registered with the Commission as the President, Chief Executive Officer, trading officer and director and the supervisory procedures officer and branch manager at Noram; and
(d)the sole shareholder of Noram.
6.By decision dated March 8, 2000 (the "BCSC Decision"), the British Columbia Securities Commission (the "BCSC") cancelled Noram's registration and ordered it to pay an administrative penalty of $25,000, for failing to maintain the required level of working capital, filing misleading financial statements and filing financial statements late. The BCSC Decisionstated the following with respect to Noram:
It is clear from Noram's conduct that it is prepared to mislead the Commission as necessary for its own purposes, and that it has no regard for its obligations as a registrant under the Act and the Rules. This conduct is inconsistent with the requirements and expectations the Commission has of registrants. The registration requirements are intended to ensure that those who trade securities for the investing public are of high integrity and worthy of their clients' trust. This is especially so of those registered in the portfolio manager category, who are entrusted with clients' funds to invest on their behalf.
Improper Portfolio Management/Misleading Promotional Materials
Background
7.Until the suspension of Noram on October 2, 1999 in Ontario and on March 8, 2000 in British Columbia, Noram provided portfolio advice to clients in these provinces. Clients of Noram (the "Clients") entered into a wrap account services agreement (the "Wrap Agreement") pursuant to which Clients' funds were held by a registered dealer, First Marathon Securities Limited (now First Marathon Correspondent Network ("FMCN")) and Noram was authorized to provide investment instructions to FMCN on behalf of Noram's clients. The Wrap Agreement also provided Noram with discretionary authority over Clients' accounts, subject to the "Standard Investment Guidelines" section of the Wrap Agreement which is in the form of a schedule to the Wrap Agreement ("Schedule A").
8.Schedule A to the Wrap Agreement is a standard form which sets out Clients' investment objectives for their accounts as follows:
1.Investment objectives for the Account:
_Capital Safety
_Income
_Liquidity
_Capital Appreciation
2.The investments in the Account are limited to:
_Government bonds, both Canadian and foreign currencies denominations
_Convertible securities, both Canadian and foreign
_Treasury Bills, both Canadian and foreign
Schedule A also requires the Clients to "fill-in and initial" the following with respect to leveraging of the Clients' account:
The account is subject to the following leverage ratio ____________________ with recognition of the attendant risk.
(Please fill in and initial)
There is no explanation in the Wrap Agreement, with respect to the meaning of "attendant risk".
9.Pursuant to section 20 of the Securities Act, R.S.O. 1990, c. S.5, as amended (the "Act"), a compliance review of Noram was conducted by Staff of the Commission ("Staff") in November, 1998. A compliance report dated May 17, 1999 (the "Compliance Report") was delivered by Staff to Noram which detailed a number of concerns that Staff had with respect to the operations of Noram. The Compliance Report required Noram to respond to Staff's concerns by June 28, 1999, which deadline was subsequently extended to July 27, 1999 at the request of Willman.
10.Noram's response to the Compliance Report was received late at the Commission on July 29, 1999. Noram's response failed to satisfactorily address the majority of concerns raised in the Compliance Report. Consequently, by letter dated November 2, 1999, Staff advised Noram that its response did not adequately address the concerns raised in the Report and requested a follow-up report by November 30, 1999. To date, Staff have not received a response to their letter dated November 2, 1999. Many of the outstanding concerns relating to the operations of Noram are detailed in the allegations set out below in paragraph 13.
Allegations Relating to Misleading Representations in Promotional Materials
11.In a variety of promotional materials, Noram made several representations to investors which were misleading and/or ambiguous and contrary to the public interest. Such representations to investors included the following:
(i)that Noram's strategies aim to protect assets by investing only in guaranteed types of investments;
(ii)that Noram's objective was to provide a steady flow of income as part of the total return irrespective of market conditions;
(iii)that Noram's asset allocation was conservative;
(iv)that Noram pursued a disciplined asset allocation strategy rooted in the major classes of fixed-income securities: Government Bonds; U.S. and Canadian Convertible Bonds; Foreign Currency Government Bonds;
(v)that by investing solely in bonds, Noram's strategy was financially conservative; and that to minimize the risk, Noram invests solely in high grade bonds;
(vi)that Noram's tactical approach typically provides more upside than downside potential;
(vii)that Noram aims to select low-risk, high profit investment opportunities;
(viii)that Noram's operations are designed to serve sophisticated clients; and that Noram offers private portfolio management to a select group of individuals; and
(ix)that Noram's strategy includes high capital safety.
12.Willman authorized, permitted or acquiesced in the conduct referred to in paragraph 11 above.
Allegations Relating to Improper Portfolio Management
13.Between February, 1993 and October 7, 1999, Noram and Willman failed to deal fairly, honestly and in good faith with Clients of Noram, did not act in the best interests of Clients and otherwise acted contrary to the public interest and prudent business practice. Among other things, Noram and Willman:
(a)failed to take adequate steps to ensure that securities bought and sold on behalf of Clients and that Noram's overall investment strategy were suitable or appropriate in view of the Clients' net worth, income, investment knowledge and experience and investment objectives and employment/retirement status;
(b)failed to disclose adequately to Clients the risks associated with the securities invested in by Noram on behalf of Clients and Noram's overall investment strategy;
(c)failed to disclose adequately, and in particular, that the securities invested in by Noram were highly risky, that leveraged investments were highly risky and that investment in these securities could result in a loss of the original capital invested;
(d)utilized leveraged investments without Clients' authorization and exceeded Clients' authorized Schedule A leverage ratios; alternatively failed to monitor the leverage ratios of Clients' accounts to ensure compliance with the maximum ratio specified by Clients in Schedule A to the Wrap Agreement;
(e)made misleading statements to clients regarding leveraged investments designed to induce them to refrain from selling their securities and to increase their leverage ratio;
(f)made incorrect and/or misleading statements that Noram only invested in guaranteed investments and that securities invested in were of the greatest quality;
(g)provided Clients with misleading and inaccurate advertising and promotional materials which, among other things, led Clients to believe that Noram invested only in guaranteed types of investments and in securities of the highest quality; and that Noram's strategy protected assets and provided a steady flow of income irrespective of market conditions; and that Noram only invested in U.S. and Canadian convertible bonds and debentures;
(h)failed to follow Clients' instructions and failed to respond to Client inquiries in a timely manner or at all;
(i)failed to have the proper controls and procedures in place to enable Noram to service its Clients adequately;
(j)failed to obtain and maintain required "know-your-client" information;
(k)failed to ensure that investment opportunities were allocated fairly amongst Clients;
(l)engaged in personal trading contrary to section 119 of the Act and section 115 of the Regulation to the Act; and
(m)engaged in principal trading and self-dealing contrary to section 118 of the Act.
Breach of Order of the Commission
Background
14.A Notice of Hearing and Statement of Allegations were issued by the Commission on September 23, 1999 against Noram. The Statement of Allegations alleged that Noram had been deficient in meeting its minimum capital requirements in amounts ranging up to $948,909 which was alleged to be contrary to the public interest and contravened the Act and Regulations thereunder. In addition, it was alleged that Noram failed to comply with terms and conditions imposed on its registration by the Commission which required Noram to file certain financial information with the Commission on a monthly basis. The hearing of this matter took place on September 27, 1999.
15.On September 29, 1999, the Commission issued an order pursuant to section 127 of the Act (the "Order") which ordered the following:
1.Pursuant to clause 1 of subsection 127(1) of the Act the registration of Noram is hereby suspended as of October 7, 1999 until the later of:
1.6 months from the date of the commencement of the suspension; or
2.the date upon which the Commission has received audited financial statements establishing that the capital deficiency has been rectified.
2.Pursuant to subsection 127(2) of the Act Noram shall provide to the Commission, until further order of the Commission:
3.quarterly financial statements, with a review report and a working capital calculation, within 45 days of the end of the quarter; and
4.monthly financial statements for those months other than those ending on thequarter date, accompanied with a working capital calculation, within 30 days of the month end; (Hereinafter referred to as the "Financial Reporting").
3.Pursuant to subsection 127(2) of the Act, Noram shall send a letter by registered mail in the form attached as Schedule "A" and Schedule "B" to each of its clients and First Marathon Correspondent Network respectively, within 24 hours after receipt by facsimile of a copy of this Order; (Hereinafter referred to as the "Investor/Dealer Notification Letters").
Allegations Relating to Breach of Order of the Commission
16.On September 30, 1999, Mr. Willman left a voice mail message for Yvonne Lo, an investigator with Staff of the Commission, in which he stated: "... I'm calling with reference to the letter - this [Investor/Dealer Notification] letter - I'm not used to being told what to write. If you people want to write on your own stationery things that simply are distorting and coercive and etc., you can do this. I am not gonna be told how to word my letters. And let's make that clear... if you people are so irresponsible I have to take the action at a different level. So please leave me alone ...".
17.By letter dated September 30, 1999, Staff of the Commission advised Mr. Willman that any failure by Noram to comply with the terms of the Order would constitute a violation of Ontario securities law and that Staff would bring proceedings against Noram.
18.By letter dated October 1, 1999, Mr. Willman advised that Noram had completed the mail-out of the Investor/Dealer Notification letters at 11:00 a.m. on October 1, 1999. Consequently, Noram did not comply with the 24 hour notification requirement set out in paragraph 3 of the Order. Staff was not, however, aware of any correspondence accompanying the Notification.
19.Under cover of letter dated October 21, 1999, the BCSC provided to Staff a copy of a letter that Mr. Willman had sent to Noram's clients (the "Undisclosed Letter"). The Undisclosed Letter makes the following inaccurate statements:
In view of the proposed suspension of Noram Capital Management, Inc. by the Ontario Securities Commission for reasons of alleged under-capitalization, we have been requested to send you a copy of their standard letter of advice. [Italics added]
In the meantime, we are planning a vigorous defensive action against the Order of the Commission as the matter of alleged under-capitalization is an entirely internal matter of Noram employees with no effect whatsoever on investment dealings, nor client services. [Italics added]
The Commission's unduly harsh and irresponsible action places hardships on both the clients and the company itself and demands proper action to counteract a case of an obvious discrimination.
20.The Undisclosed Letter enclosed a letter that had purportedly been sent to the Ontario Securities Commission (the "Enclosed Letter"). The Enclosed Letter was not received by Staff of the Commission.
21.Both the Undisclosed Letter and the Enclosed Letter misrepresent the true state of affairs with respect to Noram's capital deficiency and the content and status of the Order, by making a number of false and misleading statements to Noram clients including the following:
(a)that there was an "alleged under-capitalization";
(b)that the suspension by the Ontario Securities Commission was merely "proposed";
(c)that under capitalization was "an entirely internal matter of Noram employees with no effect whatsoever on investment dealing, nor client services";
(d)that the Commission's actions were "unduly harsh and irresponsible" and a "case of obvious discrimination";
(e)that the capital deficiency was caused by "some serious professional errors committed by Noram's agents and advisors, including negligent monitoring by Staff of the Commission";
(f)that the capital deficiency was caused by a "different interpretation of an accounting principle between the Commission and Noram's accounting firm"; and
(g)that "the Actuarial Report ... reflecting on new realities recommends cancellation of the pending transfer of $1.1 million and in fact, suggests a return of an over-funded amount in excess of $100,000 to Noram. This rectifies, in our view, the operating deficiency".
22.As the Supervisory Procedures Officer of Noram, Mr. Willman is responsible for ensuring that Noram fulfills its obligations as a registered advisor under Ontario securities law. As President and a Director of Noram, Mr. Willman is responsible in respect of the corporate actions of Noram. At page 9 of the Commission's Reasons for Decision dated October 19, 1999, it makes the following finding:
Willman testified that he is the sole registrant employed by Noram. Indeed, on the evidence, he seems to be Noram for all practical purposes.
23.To date, Noram has not provided the Financial Reporting to Staff as required by paragraph 2 of the Order.
24.By letter dated December 27, 1999, Mr. Willman acknowledges that Noram has not provided the Commission with the Financial Reporting, explaining that "due to severe financial constraints imposed on Noram by the Commission's actions, we are unable to provide theCommission with the monthly and quarterly financial statements. Besides, since the activities of the company have effectively ceased - there is little to report particularly since no public interest has ever been the issue". [Emphasis added]
25.As at February 1, 2001 Noram is deficient in filing the Financial Reporting required pursuant to the Order. In addition, as at January 30, 2001, Noram had not provided Staff with audited financial statements establishing that the capital deficiency had been rectified and therefore is still under suspension.
IV.REPRESENTATION OF THE RESPONDENTS
26.The Respondents represent that Noram is no longer in business and Andrew Willman has no intention of being engaged in any way in trading in securities in Canada.
V. CONDUCT CONTRARY TO THE PUBLIC INTEREST
27. The Respondents agree that the conduct of the Respondents described above in Part III contravened Ontario securities law and was contrary to the public interest.
VI.TERMS OF SETTLEMENT
28.Willman and Noram agree to the following terms of settlement:
(a)pursuant to clause 1 of subsection 127(1) of the Act, the registrations of Willman and Noram will be terminated permanently effective the date of the Order of the Commission approving the proposed settlement agreement herein;
(b)Willman hereby undertakes that he will never re-apply to the Commission for registration in any capacity;
(c)pursuant to clause 2 of subsection 127(1) of the Act, Willman will be prohibited from trading in securities permanently effective the date of the Order of the Commission approving the proposed settlement agreement herein;
(d)pursuant to clause 7 of subsection 127(1) of the Act, Willman is ordered to resign his position as a director and officer of Noram, effective the date of the Order of the Commission approving the proposed settlement agreement herein;
(e)pursuant to clause 8 of subsection 127(1) of the Act, Willman is prohibited from becoming or acting as a director or officer of any issuer, permanently, effective the date of the Order of the Commission approving the proposed settlement agreement herein; and
(f)pursuant to clause 6 of subsection 127(1) of the Act, Willman and Noram will be reprimanded by the Commission.
VII.STAFF COMMITMENT
29.If this settlement 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 other order in respect of any conduct or alleged conduct of the Respondents in relation to the facts set out in Part III of this agreement.
30.If the settlement is approved by the Commission, Staff will not initiate any other proceeding against the Respondents in relation to the facts set out in Part III of this agreement.
VIII.PROCEDURE FOR APPROVAL OF SETTLEMENT
31.Approval of the settlement set out in this agreement shall be sought at the public hearing of the Commission scheduled for February 9, 2001 or such other date as may be agreed to by Staff and the Respondents, in accordance with the procedures described in this agreement.
32.Staff and the Respondents agree that if this agreement is approved by the Commission, it will constitute the entirety of the evidence to be submitted respecting the Respondents in this matter, and the Respondents agree to waive their rights to a full hearing and appeal of the matter under the Act.
33.Staff and the Respondents agree that if this settlement is approved by the Commission, no party to this agreement will make any public statement inconsistent with this agreement.
34.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)each of Staff and the Respondents 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 agreement will not be referred to in any subsequent proceeding, or disclosed to any person, except with the written consent of Staff and the Respondents or as may be required by law; and
(c)the Respondents agree that they will not, in any proceeding, refer to or rely upon this 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.
IX.DISCLOSURE OF AGREEMENT
35.Counsel for Staff or for the Respondents may refer to any part or all of this agreement in thecourse of the hearing convened to consider this agreement. Otherwise, this agreement and its terms will be treated as confidential by all parties to the agreement until approved by the Commission, and forever if, for any reason whatsoever, this settlement is not approved by the Commission, except with the written consent of all parties or as may be required by law.
36.Any obligations of confidentiality shall terminate upon approval of this settlement by the Commission.
X.EXECUTION OF AGREEMENT
37.This agreement may be signed in one or more counterparts which together shall constitute a binding agreement.
DATED this day of February, 2001
NORAM CAPITAL MANAGEMENT, INC.
(Per) _______________________________
ANDREW WILLMAN
____________________________________
ONTARIO SECURITIES COMMISSION
(Per) _______________________________
"Schedule A"
IN THE MATTER OF
THE SECURITIES ACT, R.S.0. 1990, c. S.5, AS AMENDED
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IN THE MATTER OF NORAM CAPITAL MANAGEMENT, INC.
ANDREW WILLMAN
ORDER
( Section 127 of the Securities Act)
WHEREAS on July 7, 2000, the Ontario Securities Commission (the "Commission") issued a Notice of Hearing pursuant to section 127 of the Securities Act (the "Act") in respect of Noram Capital Management, Inc. and Andrew Willman (collectively the "Respondents");
AND WHEREAS the Respondents entered into a settlement agreement with Staff of the Commission dated February 5, 2001 (the "Settlement Agreement") in which they agreed to a proposed settlement of the proceeding, subject to the approval of the Commission;
AND UPON reviewing the Settlement Agreement and upon hearing submissions from counsel for the Respondent and from Staff of the Commission;
AND WHEREAS the Commission is of the opinion that it is in the public interest to make this Order;
IT IS ORDERED THAT:
26.the Settlement Agreement dated February 5, 2001, attached to this Order, is hereby approved;
27.pursuant to clause 1 of subsection 127(1) of the Act, the registrations of Willman and Noram are terminated effective as of the date of this Order;
(3)pursuant to clause 2 of subsection 127(1) of the Act, Willman is prohibited from trading in securities permanently;
(4)pursuant to clause 7 of subsection 127(1) of the Act, Willman is ordered to resign his position as a director of Noram, effective as of the date of this Order;
(5)pursuant to clause 8 of subsection 127(1) of the Act, Willman is prohibited from becoming or acting as a director or officer of any issuer, permanently, effective as of the date of this Order;
(6)pursuant to clause 6 of subsection 127(1) of the Act, Willman and Noram are reprimanded; and
(7)pursuant to subsection 127.1 (1) and (2), Willman and Noram or either of them pay $82,500 to the Commission.
DATED at Toronto this 9th day of February, 2001.