An Investment Industry Regulatory Organization of Canada (IIROC) regulatory hearing panel has ruled that the former chief financial officer at failed Toronto-based investment dealer, First Leaside Securities Inc., violated securities rules by how he handled the pricing of certain securities issued by related companies.
An announcement issued on Friday states that the IIROC hearing panel handed down a decision on July 5 that found Brian Michael Sutton “failed to ensure that proprietary fund products offered by First Leaside Securities Inc. were properly priced on client account statements.”
The case stems from a difference of opinion between Sutton and IIROC staff over the proper way to price certain securities. The hearing panel notes in its decision that there was no intent to violate the rules on Sutton’s part, and that is not alleged.
“At issue is a superficially simple difference about what constitutes an ‘active market’ for securities,” the hearing panel notes in its decision. “Mr. Sutton was of one view, the regulator of another, opposing view, and the dispute tumbled into these unfortunate proceedings.”
The decision indicates that Sutton took the position that there was an active market for fund units issued by other parts of the First Leaside Group of Companies (FL Group) and that the price was derived from trading activity on that market. However, the panel concludes that David Phillips, head of FL Group, likely set the price for the units.
“While it is not entirely clear on the record, it seems highly likely that the selection of $1 was made by Mr. Philips,” the hearing panel says in its decision. “By offering the original purchase price to investors who ‘wished to liquidate’ their investments as one witness put it, Mr. Philips offered them the security of believing they would be able to recover their investment should they choose to do so, but without making any firm or binding promises.”
Ultimately, the hearing panel concludes that it is “entirely unpersuaded that there was an active secondary market for the fund units.”
Instead, it says that the evidence in the case revealed, “Infrequent transactions at a fixed price, offered by the issuer of the fund units, for the ultimate purpose of maintaining the price and utilizing funds which were obtained from other investors for such purchases has none of the hallmarks of an active market. The fixed price was establishing not by the intrinsic value of the security or by the operations of buyers and sellers at arms-length but by Mr. Philip’s desire to preserve the FL Group.”
In 2015, the Ontario Securities Commission (OSC) ruled that Phillips and another FL Group executive, John Wilson, defrauded investors by selling almost $19 million worth of the companies’ securities without making full disclosure to investors.
In IIROC’s case against Sutton, the panel concluded that he violated the regulator’s rules in pricing certain FL Group securities.
“The decision we have reached is both obvious and difficult,” the hearing panel states in the decision. “Mr. Sutton made an aggressive, but we think honourable, attempt to persuade the regulator and ultimately this hearing panel that his interpretation of an active market was sufficiently arguable that it did not constitute a breach of IIROC [rules],”
However, the hearing panel found that Sutton failed to make his case. The hearing panel did not immediately impose any penalty on Sutton. That will be handed down after a future hearing, which has yet to be scheduled.
Photo copyright: aruba2000/123RF