Turner Phillips (Re)

IN THE MATTER OF The Securities Act, R.S.B.C. 1996, c. 418
AND IN THE MATTER OF TURNER PHILLIPS, STEVEN PHILLIPS, MARK
STONE, JACK EDWARDS, JEFFERY MILLER AND RICHARD STEWART

Decision

D.M. Hyndman, R. Wares, A.R. Wanstall

July 21, 1998.

DECISION OF THE COMMISSION

1.   INTRODUCTION

      This decision relates to a hearing under section 161 of the Securities Act, R.S.B.C. 1996, c. 418. A temporary order and notice of hearing were issued by the Executive Director on April 2, 1998. The temporary order and the notice were amended later that day.

      The temporary order removes the exemptions under the Act from six respondents  a firm called Turner Phillips and five named individuals: Steven Phillips, Mark Stone, Jack Edwards, Jeffrey Miller and Richard Stewart. The temporary order has been extended pending this decision.

      The notice alleges that Turner Phillips established a home page on the World Wide Web, accessible through the Internet, which misrepresented the firm as a full service investment dealer headquartered in Vancouver. The notice also alleges that representatives of Turner Phillips have solicited prospective clients outside British Columbia for the purpose of effecting trades in securities.

      None of the respondents appeared at the hearing. Commission staff were unable to make direct contact with any respondent but served copies of the notice by physical delivery to Turner Phillips' Vancouver address and to addresses for Turner Phillips and Steven Phillips in Ontario; by facsimile to several numbers that had been provided by Turner Phillips on its Web site or to the supplier of its Vancouver packaged office; and by Electronic mail to the address for Turner Phillips provided on its Web site. A Commission staff member also left voice mail messages at Turner Phillips' Vancouver office for each of the respondents at advising them of the details of the hearing. Section 161 of the Act requires that a temporary order and notice of hearing be sent to any person directly affected. Section 180 provides that, unless otherwise ordered by the Commission, the notice of hearing must be mailed, personally delivered or transmitted by electronic means to the person's latest known address. We are satisfied that staff have taken all reasonable steps to send the temporary order and notice of hearing to the respondents and we order under section 180 that the steps taken have satisfied the requirement under section 161 to send these documents to the persons directly affected.

2.   BACKGROUND

      Turner Phillips was represented to be an investment dealer owned by Steven Phillips of Thornhill, Ontario. Beginning in February 1998, Turner Phillips rented on a month to month basis a packaged office service in Vancouver provided by a company called Future Business Centre. The packaged office service provided Turner Phillips a mailing address, telephone and fax numbers and voice mail for each of the five individual respondents. One telephone line was permanently call-forwarded to a number in Washington State. No individual representative of Turner Phillips ever attended at the Vancouver office. Future Business Centre dealt with a person identifying himself as Steven Phillips in Ontario by telephone, fax and courier.

      Also beginning in February 1998, Turner Phillips maintained a Web site on the Internet, which represented it as an investment dealer and listed the individual respondents as its "sales and trading team". Steven Phillips was described as the Managing Director, Trading. The Web site used the address and telephone numbers of the Vancouver packaged office. It described Turner Phillips as "a full service investment dealer headquartered in Vancouver, British Columbia" specializing in "corporate finance and financial advisory services" and contained some detail about operations and business activities. It stated that Turner Phillips was a member of The Toronto Stock Exchange, the Alberta Stock Exchange, the Vancouver Stock Exchange, NASDAQ and the Investment Dealers Association of Canada, and of the Canadian Investor Protection Fund. In fact, neither Turner Phillips nor any of the individual respondents is a member of any of these organizations. None of them is registered under the Act.

      The Turner Phillips Web site was, in fact, an almost exact copy of the Web site of Peters & Co. Ltd., a registered dealer based in Calgary. It appears that Turner Phillips copied the Peters & Co. Web site and customized it by changing the name and logo for the company and the names of the individuals listed in it, and by making a few other minor changes.

      In or about March 1998, representatives of Turner Phillips contacted three persons in Europe to solicit securities transactions:

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Techment AB of Sweden was contacted by a person identifying himself as Mark Stone on behalf of Turner Phillips regarding a take over bid for shares in a U.S. company apparently held by Techment. Stone gave the Vancouver address for Turner Phillips and referred Techment to the Turner Phillips Web site.

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Ola Hagerbo of Sweden was contacted by a person identifying himself as Rick Stewart on behalf of Turner Phillips. Stewart told Hagerbo that Turner Phillips was a stock broker and that he knew she had shares in a company called Concord Capital Growth. He offered to purchase them at a high price through an elaborate transaction which required Hagerbo to provide an "insurance bond" of $9,990 (18% of the purchase price), supposedly to be held in trust and returned after completion of the purchase. Hagerbo received by facsimile documentation for the transaction on Turner Phillips letterhead using the Vancouver address and telephone and fax numbers. She also received a blank Turner Phillips "Client Information Form", which she was asked to complete and return by fax, and a document resembling a brokerage account statement, showing her holdings of Concord.

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Knut E. Koehn of Germany was contacted by a person identifying himself as Mark Stone on behalf of Turner Phillips with a solicitation to purchase shares of Primrose Hill Mercantile Corp. on terms and with documentation similar to that provided to Hagerbo. Koehn was requested to post an insurance bond of U.S.$20,000.

      Around midnight on April 2, 1998, a few hours after Commission staff issued the temporary orders and left voice mail messages for the individual respondents, Turner Phillips' Web site was removed from the Internet. A person identifying himself as Steven Phillips advised Future Business Centre on April 3 that he had the Web site removed after listening to the voice mail message from Commission staff.

3. FINDINGS

Commission staff allege that


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Turner Phillips and the individual respondents solicited trades without being registered, contrary to section 34 of the Act;

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Turner Phillips falsely represented that it was registered and was a member of the Toronto, Alberta and Vancouver stock exchanges, the Investment Dealers Association, NASDAQ and the Canadian Investor Protection Fund, contrary to section 54(2) of the Act; and

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Turner Phillips made a misrepresentation, by holding itself out as being registered when it was not registered, with the intention of effecting trades in securities, contrary to section 50(1)(d) of the Act.

      The relevant provisions of the Act are as follows:

              Section 1(1)

              In this Act ...

"material fact" means, where used in relation to securities issued or proposed to be issued, a fact that significantly affects, or could reasonably be expected to significantly affect, the market price or value of those securities;

... "misrepresentation" means
      (a)  an untrue statement of a material fact, or
      (b)  an omission to state a material fact that
              is
              (i)  required to be stated, or
              (ii) necessary to prevent a statement that is made from being false or misleading in the circumstances in which it was made; .... "registrant" means a person registered or required to be registered under this Act or the regulations;

... "trade" includes
      (a)  a disposition of a security for valuable consideration whether the terms of payment be on margin, installment or otherwise, but does not include a purchase of a security or a transfer, pledge, mortgage or other encumbrance of a security for the purpose of giving collateral for a debt,
      ...
      (d)  the receipt by a registrant of an order to buy or sell a security or exchange contract,


...

(f)

any act, advertisement, solicitation,

conduct or negotiation directly or

indirectly in furtherance of any of the

activities specified in paragraphs (a) to

(e);

              Section 34(1)

(1)

A person must not


(a)

trade in a security or exchange contract unless the person is registered in accordance with the regulations as


(i)  a dealer, or

(ii) a salesperson, partner, director or

      officer of a registered dealer and is

      acting on behalf of that dealer,

...


Section 50(1)


(1)

A person, while engaging in investor relations
activities or with the intention of effecting a
trade in a security, must not do any of the
following:

...

(d)  make a statement that the person knows, or ought reasonably to know, is a misrepresentation.


Section 54(2)


(2)

A person who is not registered must not, directly or indirectly, hold himself, herself or itself out as being registered.

      Neither Turner Phillips nor any of the individual respondents is registered under the Act. Turner Phillips created the illusion that it was a legitimate brokerage firm by renting an office address together with telephone and fax numbers, creating and using letterhead and other forms carrying the address and telephone and fax numbers, and creating a Web site that carried a fictitious description of a substantial full service investment dealer.

      Staff presented evidence that persons identifying themselves as Mark Stone and Rick Stewart, on behalf of Turner Phillips, contacted persons in Europe to solicit trades by those persons in shares they had previously purchased. They offered to purchase the shares from those individuals on terms that required the individuals to place a substantial "insurance bond", supposedly to be returned upon completion of the transaction. There is no evidence to show whether Stone and Stewart conducted the solicitations from British Columbia. In our view, they cannot be found to have traded in the province. However, Turner Phillips maintained the office and telephone numbers in British Columbia, produced and used the related letterhead, and made the representations on its Web site to support Stone's and Stewart's solicitations. In doing so, Turner Phillips engaged, in British Columbia, in an "act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance" of trades in securities. Accordingly we find that Turner Phillips traded without being registered under the Act contrary to section 34(1)(a) of the Act.

      Turner Phillips represented in its Web site that it was headquartered in Vancouver and was an "investment dealer", which is a category of registered dealer under the Act. It also represented that it was a member of various exchanges and self regulatory organizations. Any firm in British Columbia that was a member of those organizations would have to be a registered dealer under the Act. Stone referred Techment AB to the Web site containing these representations. Stewart told Hagerbo that he represented Turner Phillips and that it was a "stock broker", a term commonly used to describe a registered dealer. The materials sent by Stewart to Hagerbo and by Stone to Koehn contained documents that gave the impression Turner Phillips was a registered dealer.

      We find that Turner Phillips directly or indirectly held itself out as being registered under the Act and thereby contravened section 54(2) of the Act.

      From the solicitations made by Stone and Stewart, it is clear that Turner Phillips' purpose in creating the illusion that it was a registered dealer was to persuade investors to deal with it in securities trades. With that intention, Turner Phillips falsely represented that it was a broker in British Columbia.

      An untrue statement of a material fact is a misrepresentation under the Act. Was this an untrue statement of a material fact? A material fact is defined in the Act to mean, "where used in relation to securities issued or proposed to be issued, a fact that significantly affects, or could reasonably be expected to significantly affect, the market price or value of those securities." In this case, the statement in question did not relate to "securities issued or proposed to be issued" but to the nature and status of Turner Phillips. Accordingly, the definition of material fact in the Act is not applicable to the determination of whether the statement was an untrue statement of a material fact. Instead, we must examine whether the statement was material within the context of the relevant statutory provisions and the relationship between Turner Phillips and the investors.

      Section 50(1) of the Act prohibits several different types of representations, including misrepresentations, that would be expected to be used to unduly influence or mislead investors in order to induce them to buy or sell securities. In that context, a  material fact would be one that is important to the investor in deciding whether or not to enter into a securities transaction. Clearly, it would be important to an investor to know whether the person attempting to effect the trade is a legitimate firm properly authorized in the securities business. This conclusion is further supported by the fact that section 54(2) of the Act specifically prohibits a person that is not registered from representing that it is. The Legislature obviously considered a representation concerning a person's registration status to be particularly important and sensitive to investors. We find that Turner Phillips' representation that it was an investment dealer, a stock broker and a member of various exchanges and self regulatory organizations, and its implicit representation that it was registered under the Act, was an untrue statement of a material fact, and therefore a misrepresentation.

      In making a misrepresentation with the intention of effecting a trade in a security, Turner Phillips contravened section 50(1)(d) of the Act.

4.   DECISION

      This case demonstrates the ability of the unscrupulous to use the modern technology of communications to prey on the unwary. Turner Phillips used the Internet, a packaged office service and phoney letterhead and forms to create an illusion of substance where none existed. The evidence concerning its attempted dealings with European investors demonstrates that the illusion was intended to induce these investors into entering transactions that had the appearance of fraud.

      Steven Phillips orchestrated the setting up of the office and apparently had sufficient control over the Web site to shut it down after the Commission staff issued the temporary orders. He was also represented as the Managing Director, Trading. He must be held responsible for Turner Phillips' actions.

      Stone and Stewart were listed on the Web site as part of the sales and trading team. They contacted the investors in Europe, but we found no evidence upon which to conclude that they were trading from British Columbia. Edwards and Miller were also represented as part of the sales and trading team. However, there is no evidence of any other involvement and, indeed, no substantive evidence that they exist. We therefore find insufficient evidence upon which to base any orders against the individual respondents, other than Steven Phillips.

      Turner Phillips and Steven Phillips were clearly intending and attempting to use the illusion they created and their false representation that they were registered for financial gain at the expense of investors. We consider it in the public interest to make the following orders to protect investors from this type of conduct.

      We order:

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under section 161(1)(a) of the Act that Turner Phillips cease contravening sections 34(1), 50(1)(d) and 54(2) of the Act and that Steven Phillips cause Turner Phillips to cease contravening those sections;

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under section 161(1)(c) that the exemptions described in sections 44 to 47, 74, 75, 98 and 99 do not apply to Turner Phillips or Steven Phillips for ten years; and

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under section 161(1)(d) that Steven Phillips resign any position that he holds as a director or officer of an issuer and that he be prohibited from becoming or acting as a director or officer of an issuer and from engaging in investor relations activities, for ten years.