OSC rejects motion to dismiss allegations

The OSC has brought allegations against PFAM and McKinnon in connection with a
$1.2 million discrepancy in certain principal protected notes (PPN) for which PFAM acted as an advisor, selling agent and note administrator.

See: OSC denies registration for Pro-Financial founder

The OSC alleges that PFAM’s conduct involving PPNs caused it to breach its registration requirements, and that McKinnon allowed that conduct to occur.

According to the OSC hearing panel’s decision on the motion to dismiss these allegations, McKinnon argued that the PPN allegations do not involve PFAM acting as a dealer or advisor to its clients, or engaging in activity that requires registration. OSC staff opposed the motion to dismiss on the basis that it is premature. OSC staff also argued that, even if the PPN allegations were dismissed, related allegations would remain unresolved; and that the charges should be heard in their entirety.

In its decision, the OSC hearing panel notes that the evidence relating to the PPN allegations “would not likely be distinct from the evidence to be tendered at the hearing on the merits relating to other allegations”.

“In particular, it is clear that the evidence relating to the PPN allegations will not be distinct from the allegations relating to PFAM’s alleged failure to establish, maintain and apply policies and procedures that establish an adequate system of controls and supervision,” the OSC hearing panel decision says.

The OSC hearing panel decided that disposing of the PPN allegations on a preliminary motion would not speed up the overall hearing; and that the issue about whether registration requirements apply “is not a purely legal issue, but rather an issue of mixed fact and law which cannot be determined on the basis of the evidentiary record provided in connection with the hearing on the motion.” And, as the facts of the case are in dispute, the hearing panel concluded that a full hearing of the allegations is necessary.

McKinnon also argued that it is not in the public interest to hear the PPN allegations, “because the connection to Ontario securities law is at most marginal.”

“In McKinnon’s view, allowing the PPN allegations to proceed will inevitably result in the parties and the commission spending countless hours and significant funds allocating blame for what was an accounting miscommunication between commercially sophisticated counterparties and which resulted in no investor harm,” the OSC hearing panel decision says.

However, OSC staff argued that, “There is a public interest in seeing serious allegations of breaches of Ontario securities law properly and fairly adjudicated in a public forum on a full evidentiary record and mindful of the need to be fair to the parties.”

Here again, the OSC hearing panel sided with OSC staff. “There is no compelling public interest consideration arising in the motion that should prompt the commission to decline to hear the PPN allegations,” the OSC hearing panel decision says.