An Ontario Securities Commission (OSC) panel has ruled that it’s not in the public interest to find that fictitious characters have violated securities laws.
The OSC released its decision and reasons today in a hearing that was completed earlier this year into securities fraud allegations against several firms and individuals that were involved with an alleged advance fee scam. OSC staff claimed that between August 14, 2008 and June 11, 2009, individuals identifying themselves as representatives of Nest Acquisitions and Mergers (Nest A&M) and IMG International Inc. (IMG), solicited investors to participate in an advance fee scheme.
“The scheme involved artificial offers by Nest A&M or IMG to purchase shares owned by the U.K. residents at inflated prices. As part of the sales pitch, purported representatives of Nest A&M and IMG told the U.K. residents they would have to pay advance fees in order to complete the transactions and receive the promised purchase price,” the OSC says.
Ultimately, it concluded that one of the firms, IMG, and that one of the individuals, David Paul Pelcowitz, who it says ran IMG, committed fraud; facilitated trading; and, acted contrary to the public interest. It didn’t hand down any penalties against them yet; those will be determined after a sanctions hearing, which is set for June 27.
However, the panel also ruled that it couldn’t find that Nest A&M, or an individual going by the name, Michael Smith, violated the law, since OSC staff could not prove that they exist.
Indeed, the panel found that OSC staff failed to prove that Smith was a real person. In its decision, the OSC panel notes that Pelcowitz was the only one who testified to dealing with Smith, and that he also impersonated Smith on a couple of occasions, including in a voicemail left for OSC staff during the investigation. It also found that OSC staff failed to prove that Nest A&M exists too, and that staff believe that it was a fictitious entity used in the scheme. And, it concluded that it could not find against a person or firm without first proving they exist.
The panel indicates that its conclusion runs counter to the findings of an earlier panel in a similar case involving an apparent advance fee scheme, where an allegedly fictitious firm using the name ‘Lehman Brothers’ was found to have committed fraud and other violations. In that case, it notes that OSC staff didn’t ask for disgorgement or monetary penalties. “Perhaps the cognitive dissonance created by ordering a fictitious entity to pay sums to the commission persuaded staff to avoid an incongruous result,” it says.
It also disagreed with that earlier decision when it comes to finding against unknown individuals, noting that it is concerned about the potential impact on real people with similar names. “A real Michael Smith could, at the least, be inconvenienced,” it says. “This potential to cause difficulty outweighs any imagined benefit of issuing orders against persons unknown to the commission.”
Instead, it concludes that it would be contrary to the public interest for the commission to find that an unknown person has contravened the act.
Late last year, the OSC approved a settlement with another person accused in the scheme, and dropped its allegations against a fourth person.