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The past few weeks have witnessed two significant developments in the continuing battle of the province's securities regulators to curtail abuses by certain members of the brokerage community in the over-the-counter sale of penny stocks.

Each year these abuses cost innocent Ontario investors millions of dollars in hard-earned savings. Most of the losers are just everyday working people whose mistake was to pick up the phone when the penny stockbroker called.

The more recent of the two events was the well-publicized settlement between staff of the Ontario Securities Commission and A.C. MacPherson & Co. Inc., which was approved by the commission on April 6.

This matter began as an investigation by enforcement staff of the Toronto Stock Exchange. The investigation led to allegations by OSC staff that A.C. MacPherson engaged in conduct contrary to the public interest by selling penny stocks quoted on the Canadian Dealing Network (CDN) at excessive markups. A.C. MacPherson largely admitted the conduct complained of and agreed to go quietly out of business. The commission approved the settlement, implicitly accepting the position of its staff that A.C. MacPherson's excessive markups were in and of themselves contrary to the public interest.

The A.C. MacPherson decision brings full circle the decade-long effort by staff of the TSE and the OSC to curtail abuses in secondary market sales of penny stocks by registered brokers.

In 1991, staff of the OSC brought proceedings before the commission to terminate the registration of Trend Capital Services Inc., a securities dealer whose business was primarily telephone sales of penny stocks from its own inventory account. Among the allegations staff made against Trend was that it marked up the securities it acquired for resale by as much as 100 per cent and that this was, in itself, reason enough to terminate Trend's registration.

Curiously, the commission rejected Staff's argument in the Trend case that the markups charged were contrary to the public interest but went on to terminate Trend's registration based on findings of abusive sales practices. Thus began the OSC's 10-year penny-stock odyssey that included the unsuccessful attempt to promulgate a comprehensive penny-stock policy and two long and expensive sales practices hearings involving securities dealers, E.A. Manning Ltd. and Marchment & MacKay Ltd.

The idea that excessive markups were abusive was not a novel one even 10 years ago. South of the boarder, the National Association of Securities Dealers already had a 5-per-cent markup rule. Furthermore, the SEC had successfully argued that excessive markups violated the antifraud provisions of the U.S. securities statutes.

Granted the OSC's own Canadian Over-the-Counter Automated Trading System (COATS) -- later the CDN -- policy expressly stated that it did not purport to regulate markups. However, this did not and should not have prevented the commission from finding that excessive markups by penny-stock dealers were unacceptable and contrary to the public interest. The simple adoption of the U.S. "shingle theory" (hanging out your shingle impliedly represents you will deal fairly with clients) would have undoubtedly led to this result without doing any harm to the COATS policy.

Almost 10 years after the Trend decision, it was evident that the commission's view on the subject of excessive markups was evolving when it issued its reasons last summer in the Marchment & MacKay case. In addition to findings of abusive sales practices, the commission took clear aim at Marchment & MacKay's practice of buying stock cheap from "wholesalers" and selling it to clients at markups that were sometimes several multiples of its acquisition cost.

These prices bore no relationship to any true value or market price for the securities in question. Indeed, the quoted market for the securities on CDN was entirely ephemeral, insofar as it had no depth and offered no real liquidity to investors. The commission's recognition of this fact appears to have led to a fundamental change in its thinking on excessive markups.

The approval of the settlement in the A.C. MacPherson case should therefore mark the beginning of the end for unscrupulous penny-stock dealers. For more than a decade they have made their living primarily by buying cheap and selling dear in the secondary market for over-the-counter stocks.

More often than not the underlying companies have few if any prospects and their securities have little or no intrinsic value. There should therefore be no shortage of evidence available to OSC staff upon which to bring similar proceedings against other penny-stock dealers whose conduct parallels that of A.C. MacPherson.

This is where the second of the recent developments referred to comes into play. On Feb. 29, the director of the OSC issued reasons to support her earlier decision refusing the request of Craig Alan Jaynes, a former Marchment & MacKay stockbroker, for reinstatement of his registration with another securities dealer.

The upshot of the decision was that Mr. Jaynes' request to transfer his registration was refused because of his willing participation in the wrongdoings at Marchment & MacKay. The director turned Mr. Jaynes away, citing not only the evidence against him but also the need to foster the principle of general deterrence of others.

The combination of the A.C. MacPherson settlement and the Jaynes decision appears to have caused a minor panic among those individual registrants who ply the phone selling penny stocks at inflated prices. A friend and fellow practitioner tells me he has already been consulted by several brokers who are looking to jump ship before their house goes down.

Before the Jaynes' decision, these would probably have been easy briefs for my friend to take on. After Jaynes, one would hope that the commission will not permit the wholesale flight to safe havens of those who have willingly participated in what has been and continues to be a significant blight on the integrity of Ontario's capital markets. Jim Douglas is a commercial litigation partner with Borden Ladner Gervais LLP whose practice is primarily in the area of securities litigation. Mr. Douglas was counsel to staff of the OSC on the Trend, E.A. Manning and Marchment & MacKay cases.