MFDA Decision and Reasons

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File No. 201727

IN THE MATTER OF A DISCIPLINARY HEARING PURSUANT TO SECTIONS 20 AND 24 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: Mahmoud Rihawi, Attal Golzay, Ajmal Golzay, Roomal Golzay, Mustafa Sayed Hashimi, Zobair Hashimi, Sama Tabesh, Saadet Kolgekaya, Rhea Galias Fortes, Shameel Rawani, Anjum Pathan, and Mohammad Yunas Masood

Heard: May 16-17 and May 25, 2018 in Toronto, Ontario

Decision and Reasons: November 27, 2018

Decision and Reasons

Hearing Panel of the Central Regional Council:

  • Paul M. Moore, QC, Chair
  • Guenther W. K. Kleberg, Industry Representative
  • Joseph Yassi, Industry Representative

Appearances:

  • Francis Roy, Counsel for the Mutual Fund Dealers Association of Canada
    Mahmoud Rihawi, Attal Golzay, Ajmal Golzay, Roomal Golzay, Mustafa Sayed Hashimi, Zobair Hashimi, Sama Tabesh, Saadet Kolgekaya, Rhea Galias Fortes, Shameel Rawani, Anjum Pathan, and Mohammad Yunas Masood, Respondents, not in attendance or represented by counsel

PART I. GENERAL

The Misconduct

  1. The 14 persons named in the Notice of Hearing dated February 28, 2017 (“Notice of Hearing”) were Approved Persons at the Mississauga branch of WFG Securities Inc. (“WFG”), an MFDA Member. They operated a branch-wide scheme (the “scheme”) to falsify documents to enable them to sell leveraged investments to clients who did not meet the suitability criteria of WFG, and conspired to cover up (the “cover up)” their misconduct by agreeing to mislead, and by misleading WFG in its investigation of their conduct. Several also misled the MFDA in its investigations or failed to co-operate with the MFDA. The misconduct was itemized in six allegations in the Notice of Hearing, and the person to whom each allegation applied was specified.
  1. Appendix “1” is the Notice of Hearing which sets out the allegations against each Respondent and particulars alleged. (In particular, the persons named in the Notice of Hearing are: Mahmoud Rihawi (“Rihawi”), Attal Golzay (“Attal”), Ajmal Golzay (“Ajmal”), Roomal Golzay (“Roomal”), Mustafa Sayed Hashimi (“Mustafa”), Zobair Hashimi (“Zobair”), Sama Tabesh (“Tabesh”), Saadet Kolgekaya (“Kolgekaya”), Hammond Lieu (“Lieu”), Rhea Galias Fortes (“Fortes”), Shameel Rawani (“Rawani”), Anjum Pathan (“Pathan”), Mohammad Yunas Masood (“Masood”) and Juliene da Rosa Lima (“Lima”).
  1. Staff withdrew the allegations against Lima, one of the persons named in the Notice of Hearing.

Lieu Settlement

  1. Lieu, another of the persons named in the Notice of Hearing, entered into a settlement agreement (the “Lieu Settlement”) on May 10, 2018. The Lieu Settlement was presented to the panel for acceptance at an in camera hearing on May 16, 2018 held just prior to the hearing for the remaining persons (the “Respondents”).
  1. In the Lieu Settlement, Lieu agreed to provide truthful testimony and evidence in this proceeding against the Respondents.
  1. The agreed penalty in the Lieu Settlement was a permanent prohibition.
  1. The panel reserved judgment on whether to accept the Lieu Settlement until it made its decision regarding the Respondents.

Tabesh ASF

  1. One of the Respondents, Sama Tabesh, and staff signed an agreed statement of facts (the “Tabesh ASF”) dated May 15, 2018. In the Tabesh ASF, Tabesh admitted facts establishing three of the four allegations against him, and staff and Tabesh made a joint recommendation as to penalty for the three allegations. Staff advised that upon acceptance of the Tabesh ASF into evidence by the panel, it would withdraw a fourth allegation (misleading the MFDA) against Tabesh.
  1. The panel made it clear that the Tabesh ASF was not a settlement agreement and that it was not bound to accept the joint recommendation as to penalty if it admitted the Tabesh ASF into evidence. Staff confirmed that the general affidavit of its investigator, Mr. Lambshead, previously introduced into evidence, covered the scheme and cover up by the Respondents and that staff had available for introduction into evidence a specific affidavit of Mr. Lambshead as to the misconduct relating specifically to Tabesh.
  1. The panel observed that Tabesh had two options. He could agree to let the Tabesh ASF stand and have it entered into evidence with the understanding that although the panel would consider the joint recommendation as to penalty, it would not be fettered by it in exercising its discretion as to the appropriate penalty for him; or he could take back the Tabesh ASF in which case the panel would disregard it. Staff confirmed, however, that if Tabesh took back the Tabesh ASF, staff would not withdraw the fourth allegation against Tabesh; and staff would introduce into evidence the specific affidavit of Mr. Lambshead pertaining to Tabesh’s conduct.
  1. After a 20 minute adjournment, Tabesh advised he had decided to let the Tabesh ASF stand and be entered into evidence.
  1. After hearing from staff and Tabesh the panel announced that it had determined that the three remaining allegations against Tabesh had been proved and that Tabesh had violated the rules referred to in them. The panel advised that it would reserve judgment as to the appropriate penalty for Tabesh until it was ready to determine the appropriate penalty for the other Respondents.
  1. After this, Tabesh and his counsel left the hearing.
  1. Appendix “2” sets out the Tabesh ASF.

No contention of fact

  1. Of the persons named in the Notice of Hearing, only Tabesh (and his counsel) and Lieu (as a witness) appeared at the hearing.
  1. None of the other Respondents filed a Reply or appeared at the hearing, in person or by agent, or took any other steps to answer the allegations against them.
  1. In this matter, the facts were not in issue.

PART II. DECISION ON THE MERITS

  1. The panel announced that it would proceed with the hearing in the absence of the remaining Respondents and would accept as proven against the remaining Respondents the facts and conclusions drawn in the Notice of Hearing, including the particulars, as permitted by section 20.4 of MFDA By-law No. 1, and Rules 7.3 and 8 of MFDA Rules of Procedure.
  1. Notwithstanding this, staff presented two witnesses, Lieu and its investigator, Mr. Lambshead. It also introduced in evidence through Mr. Lambshead a general affidavit regarding the scheme and cover up, and 11 affidavits, one for each of the other 11 remaining Respondents. Finally, staff provided information requested by the panel on commissions earned and loan amounts and outstanding balances which it obtained from WFG.
  1. The evidence of staff’s two witnesses, Lieu and Mr. Lambshead, and in the affidavits of Mr. Lambshead was clear, convincing and uncontroverted and substantiated on a balance of probabilities the facts and conclusions drawn in the Notice of Hearing.
  1. The panel determined that the misconduct alleged against the remaining Respondents was a violation of the Rules, By-law, and Policies referred to in the allegations.

PART III.  ISSUES

  1. Accordingly, the issues the panel faced revolved around an appropriate penalty for each of the Respondents.
  1. With regard to the Lieu Settlement (which the panel had considered in the settlement hearing immediately prior to the commencement of the hearing of this matter and on which it had reserved judgment) the panel had only two options: to accept it in its entirety or to reject it.
  1. The panel determined that it could not accept the Lieu Settlement if doing so would require, for fairness and consistency, that the panel not impose fines on the Respondents for their same or similar misconduct. The panel determined that it could accept the Lieu Settlement if it determined that not imposing a fine on Lieu in the face of the fines it would impose on the Respondents was fair and reasonable and in the public interest.
  1. With regard to the joint submission on penalty in the Tabesh ASF, the panel had to determine how much deference it should give to it, and whether, if it decided for fines suggested in the joint recommendation, the panel would then be required, for fairness and consistency, not to impose fines on the remaining Respondents for allegations #1, #2, and #3, much different from those suggested for Tabesh in the Tabesh ASF.

PART IV. PENALTIES

Approach of the panel to determine appropriate penalties

  1. The panel considered the MFDA penalty guidelines and the precedent cases submitted to us by staff, discussed below, the submission of staff concerning the Lieu Settlement, the joint recommendation on penalty in the Tabesh ASF, and staff’s submission on penalty for the remaining Respondents.

MFDA Penalty Guidelines

  1. The guidelines suggest one or more of a minimum fine of $5,000 and a permanent prohibition for breach of the standard of conduct in Rule 2.1.1.
  1. They suggest one or more of a minimum fine of $10,000 and a permanent prohibition for a breach of suitability and know-your -client requirements under Rule 2.2.1.
  1. They suggest one or more of a minimum fine and a permanent prohibition for a breach of the supervision requirements of Rules 2.5.1, 2.5.5, 1.1.2 and 2.1.1 and MFDA Policy No. 2.
  1. They suggest one or more of a minimum fine of $50,000 and a permanent prohibition for failure to co-operate with or for misleading the MFDA contrary to section 22.1 of MFDA By-law No. 1.
  1. The guidelines suggest several factors to consider in determining an appropriate penalty, including the magnitude of losses directly attributable to the conduct, the number of clients affected, evidence of cover up of the conduct, the existence of any pattern, and whether the contraventions were intentional or inadvertent.

Precedent cases

  1. Staff submitted several precedent cases, including the following.
    1. Daubney et al. (2008) [Daubney,2008 ONSEC 16]

      In this case a panel of the Ontario Securities Commission listed some factors that the Commission considers when determining appropriate sanction (which we took into consideration in setting the penalties for each  of the Respondents):

      1. the seriousness of the allegations proved;
      2. the respondent’s experience in the marketplace;
      3. the level of a respondent’s activity in the marketplace;
      4. whether there has been a recognition of the seriousness of the improprieties;
      5. whether or not the sanctions may deter not only those involved in the case, but any like -minded persons from engaging in similar conduct in the capital markets;
      6. any mitigating factors;
      7. the size of any profit (or loss avoided) from the improper conduct;
      8. the size of any financial sanction or voluntary payment when considered with other factors;
      9. the effect any sanction might have on the livelihood of the respondent;
      10. the restraint any sanction might have on the ability of the respondent to participate without check in the capital markets;
      11. the reputation and prestige of the respondent;
      12. the financial consequences to the respondent;
      13. the remorse of the respondent.
    2. Adeola (2015) [Adeola (Re), MFDA Central Regional Council, File No. 201401]

      This case (uncontested) involved one uncooperative respondent who falsified information for unsuitable leveraged investments for 7 clients over an 8 month period. Clients lost at least $180,000. The respondent received commissions on approximately $700,000 of unsuitable leveraged mutual funds. Penalties included a permanent prohibition and fines and costs of $260,000.

    3. DeVuono (2012) [DeVuono (Re), MFDA Pacific Regional Council, File No. 201102]

      This case (contested without counsel) involved one respondent who sold unsuitable leveraged investments to 2 clients over a 3 year period. Clients lost in excess of $285,000. The respondent earned commissions of at least $38,300. Penalties included a 3 year prohibition and a fine and costs of $170,000.

    4. Arseneau (2012) [Arseneau (Re), MFDA Atlantic Regional Council, File No. 201115]

      This case (uncontested) involved one respondent who falsified information and made unsuitable leveraged investments for at least 20 clients and did not do suitability checks for 155 clients over a 3 or 4 year period. Commissions from unsuitable leveraged investment were about $630,000. Client losses were at least $358,000. Penalties included a permanent prohibition and a fine and costs of $520,000.

    5. Ogalino (2014) [In the Matter of Estrellea Olgalino, MFDA Central Regional Council, File No. 201248]

      This case (uncontested) involved one respondent who misappropriated at least $52,000 from at least 8 clients over a 3 and a half year period and failed to cooperate.  Penalties included a permanent prohibition and a fine and costs of $117,500.

    6. Villarin (2014) [Villarin (Re), MFDA Prairie Regional Council, File No. 201352]

      This case (uncontested) involved one respondent who falsified information for unsuitable leveraged investments for 14 clients over approximately 2 years and failed to cooperate. Clients lost $400,000 and had over $1,500,000 of investment monies exposed. Penalties included a permanent prohibition and a fine and costs of $260,000.

    7. Pretty (2014) [Pretty (Re), MFDA Atlantic Regional Council, Hearing Panel Decision dated January 30, 2014]

      This case (contested) involved one respondent who recommended and misrepresented leveraged investments to 6 clients over a 3 and a half year period and failed to cooperate. Clients lost at least $540,000. Two clients still owed the bulk of their loans of approximately $800,000 and the value of their investments was insufficient to pay off the loans. The respondent received $48,000 in commissions. Penalties included a permanent prohibition and a fine and costs of $125,000.

    8. Gragasin (2014) [Gragasin (Re), MFDA Prairie Regional Council, File No. 201249]

      This case (contested) involved one respondent who falsified information and made unsuitable leveraged investments for 10 clients over about one and a half years. There was an agreed statement of facts. The reasons gave no information on the amount of investments or client losses or financial benefits to the respondent. They stated that by borrowing funds himself to purchase mutual funds, the respondent created financial hardship for his family and was considered to have suffered severely for his actions. This was considered a mitigating factor. Penalties included a 3 year prohibition and a fine and costs of $35,000.

    9. Sarker (2014) [Sarker (Re), MFDA Central Regional Council, File No. 210327]

      This case (contested without counsel) involved one respondent who falsified information and made unsuitable leveraged investments for 2 clients over a 5 month period. There was an agreed statement of facts. Clients lost about $70,000 as a result of the respondent’s actions. One client also lost about $150,000 on his own account by taking out an investment loan to buy mutual funds. There was no information on benefits received by the respondent.  The respondent addressed the panel. He was sorry. He was a college student and hoped to embark on a new career outside the securities industry. He said he had not received proper training from his Member which led him to make his mistakes. Penalties included a 3 year prohibition and a fine and costs of $22,500.

    10. Lipski (2010) [Lipski (Re), MFDA Pacific Regional Council, File No. 201012]

      This case (contested without counsel) involved one respondent who falsified information and assisted 12 clients to borrow money and invest in unsuitable leveraged investments over a 2 year period and misled his Member and the MFDA. There was an agreed statement of facts with admissions of misconduct.  The admissions were considered a mitigating factor. Client loans amounted to $1,525,000. The MFDA’s investigation did not reveal any client losses or the benefits received by the respondent. The penalties included a permanent prohibition and a fine and costs of $30,000.

The Scheme and the Cover up

  1. The Respondents’ misconduct was contemptible and an embarrassment to the entire investment industry. The Respondents have demonstrated that they have no concern or thought for clients or the regulatory regime. They are ungovernable and should not be involved in the securities business. The misconduct was not an isolated incident but part of a larger pattern of conduct involving multiple clients.
  1. Collectively, the Respondents and Lieu engaged in conduct that affected at least 50 clients who obtained investment loans totaling approximately $4.2 million.
  1. The proceeds of the loans were used for the purchase of leveraged investments, being return of capital mutual funds.
  1. The scheme operated over a period of 6 years.
  1. The Respondents conspired to mislead WFG about their scheme, thereby exacerbating WFG’s inability to conduct a reasonable supervisory investigation of their activities.

Permanent Prohibition

  1. The misconduct was egregious.
  1. The Lieu Settlement, the joint submission on penalty in the Tabesh ASF, and staff’s submission on penalty for the remaining Respondents called for a permanent prohibition on each of the respective person’s authority to act and be registered (for Lieu and Tabesh, as a salesperson, and for the remaining Respondents, in any capacity) in the mutual funds industry.
  1. The panel agreed that this was appropriate for Lieu. The panel determined that Tabesh and the remaining Respondents should be permanently prohibited from acting or being registered in any capacity in the mutual funds industry.
  1. This was consistent with the recommendations in the MFDA penalty guidelines and the precedent cases, and in accordance with the mandate of the MFDA to be protective of the securities industry and preventative of harm, as outlined in Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario Securities Commission, [2001] S.C.R. 132.

Fines

  1. The panel agreed that in view of the significant nature of the misconduct, namely, the long-lasting, deliberate, widespread, and coordinated deceit of the participants in the scheme, the conspiracy to cover up and mislead the investigation of WFG, the disregard for the suitability criteria, the unsophistication of the clients involved, and the apparent unfamiliarity of the Respondents with the nature of the leveraged investments sold to their clients, appropriate fines were necessary as a deterrent to others in the industry.
  1. To address fairness, consistency and comparability of the penalties for the Respondents and Lieu, the panel first determined a normative amount (the “norm”) for each allegation, or group of allegations, based on general considerations applicable to the misconduct, without adjustments based on factors it considered relevant for each person. It then considered factors that were relevant for each person to vary the norm.
Allegations #1 and #2 (falsification and suitability)
  1. The panel grouped allegations #1 and #2 because they were closely connected and reflected the misconduct of the scheme. The panel set the norm for allegations #1 and #2 at $10,000 based on suggestions from the MFDA penalty guidelines and precedent cases submitted by staff.
  1. Staff submitted that the guidelines suggest a minimum fine of $50,000 for fraud or forgery and suggested a fine of $50,000 for the misconduct in allegations #1 and #2 for each Respondent except Tabesh and Fortes. But the guidelines state that the $50,000 suggestion for fraud or forgery is only for fraud or forgery to deprive others of property or rights. Egregious as the deceit in this matter was, there was no evidence that the Respondents intended to deprive their clients or others of their property or rights, or that there was any misappropriation. Indeed, the Respondents appeared to operate the scheme under the mistaken belief that their scheme would allow their clients to make advantageous investments they would otherwise be prevented from making.
  1. The panel made adjustments upward or downward from the norm of $10,000, taking into consideration, to some extent, the number of loans and dollar amounts applicable to each Respondent, and personal factors, such as the fact that Pathan’s only loan and investment were for himself and his wife, or the fact that Fortes had just one client and the loan amount was just $25,000 which had been paid off.
  1. Not a great deal of weight was given to numbers applicable to each Respondent alone because the misconduct was part of a collective scheme and a cover up in which all participated. The Respondents were also connected through the business compensation arrangements at WFG which was applicable to them. It provided for more senior sales persons to share in commissions earned by sales persons recruited by them or reporting up to them (the “pyramid compensation arrangements”).
Allegation #3 (misleading WFG)
  1. The panel determined $20,000 as the norm for the fine applicable for misconduct in allegation #3 based on the MFDA guidelines, precedent cases submitted to the panel and the submission of staff on penalties for Respondents other than Tabesh. An adjustment downward of $10,000 was made for Fortes, Pathan, Ajmal, Roomal, Rawani, and Massood who were junior and minor players in the scheme. No adjustments were made for the other Respondents.
Allegation #4 (mismanagement)
  1. Only Attal was charged with this allegation. He was the only Respondent with management and supervisory responsibilities at the branch. He reviewed and supervised the forwarding to WFG of the documentation which he knew had been falsified.
  1. He was a ring-leader in implementing, overseeing and training other members of the branch as they participated in the scheme.
  1. He was a prime participant in the cover up and called the first meeting on June 13, 2014 with the other Respondents to get their stories consistent just before the meeting with a senior member of WFG investigating client complaints.
  1. As a senior participant in the pyramid compensation arrangement at WFG, he stood to gain a good deal from the commission sharing arrangements with those under him participating in the scheme.
  1. Staff suggested a fine of $15,000 for this allegation.
  1. However, the panel set the fine at $30,000 for this allegation after considering precedent cases and the key role that Attal played, and his deliberate and callous disregard for the policy and rules of WFG regarding suitability and management supervisory and compliance requirements.
Allegation #5 or #6 (misleading or failure to cooperate with the MFDA)
  1. Each Respondent, other than Tabesh, was charged either with allegation #5 or #6, but not both.
  1. Tabesh was originally charged with allegation #6, but it was withdrawn against him as a consequence of the Tabesh ASF.
  1. The panel determined the norm for misconduct in allegation #5 or #6 to be $50,000, based on the MFDA guidelines, precedent cases submitted to us, and staff’s submission on penalties for Respondents other than Tabesh.
  1. As submitted by staff, the panel adjusted this norm to $25,000 for Fortes in recognition of her eventually admitting to staff her misconduct, and correcting her earlier denial to staff of any misconduct.
  1. We determined that no other adjustments to the norm was warranted for the other Respondents subject to either of these allegations.
Other considerations in setting amounts
i) Absence of evidence of client harm
  1. There was no evidence of significant client harm resulting from the Respondents’ misconduct, perhaps because of the difficulty staff faced in gathering evidence from uncooperative Respondents, or perhaps the clients were lucky because of the market at the time. Of course, although we had little evidence of actual client monetary harm, we know that clients were subject to great risk that comes from leveraging. Some are still saddled with loan balances outstanding the size of which may be totally inappropriate for them.
  1. The few clients who complained to WFG were made whole by WFG.
  1. The absence or presence of client monetary harm was an important factor in the size of fines in the precedent cases. It is suggested in the MFDA penalty guidelines as an important factor for panels in determining an appropriate penalty.
  1. The norms for fines would have been set by us at higher amounts if there had been evidence of significant client losses.
ii) Absence of evidence of significant profits
  1. Although staff did not adduce evidence of the specific benefits received by the Respondents as a result of their misconduct, the Respondents would have received a portion of the commissions received by WFG on the sales of the leveraged investments (return of capital mutual funds) sold to clients as part of the leveraged investment strategy recommended by the Respondents.
  1. Trailer fees on the clients’ investments would have been:
    1. 5 % per year on the total assets that remained invested in the deferred sales charge version of the funds; and
    2. 1% per year on the total assets that were re-invested in low load versions of the fund.

    A sales commission of up to 5% was paid on the initial sale of a deferred charges version of the fund.

  1. During his testimony, Lieu stated that, depending on their level of seniority within WFG (which ranged from associate to senior marketing director), the Respondents could be expected to be paid by WFG between 2% and 4% of sales commissions. The Respondents would also have received a portion of the trailer fees paid out by the fund. The higher the seniority of the Respondent, the higher the compensation received by the Respondent as a result of “overrides” paid to them by WFG from their “downlines” earnings under the pyramid compensation arrangements.
  1. Of approximately $4.2 million of leveraged investments sold by the Respondents and Lieu over the period of the scheme, we estimated that shared commissions paid to the Respondents and Lieu in aggregate would have possibly amounted to approximately $100,000 to $150,000, not including trailing commissions.
  1. These are not big numbers when compared with the benefits received by respondents in precedent cases with similar misconduct where they received large fines.
iii) The Knowledge and skills of the Respondents
  1. Many of the Respondents were part time workers at the branch and held down other jobs. Most, if not all, were naive. Lieu testified that everyone thought the mutual funds which they sold as leverage investments paid dividends or interest from profits and that no one realized that the investments maintained their set payout amounts from a return of capital when profits were insufficient. We concluded that the Respondents were unsophisticated and not knowledgeable about the leveraged investments they sold. This was inexcusable.
iv) Respondents’ Recognition of the Seriousness of their Misconduct
  1. The Respondents other than Tabesh did not respond to the disciplinary proceeding. They either did not recognize the seriousness of their misconduct, or were unwilling to take responsibility for it. This was an aggravating factor with respect to penalty.
v) Duration of the scheme
  1. The scheme began in 2008 for some of the Respondents with others joining in as they were recruited and trained in the branch, and lasted until the Respondents and Lieu had their employment terminated by WFG in 2014.
vi) No Prior disciplinary problems
  1. None of the Respondents had any prior disciplinary problems with the MFDA. However, we did not consider this to be a mitigating factor considering the seriousness of the misconduct.
vii) Individual circumstances
  1. We looked at specific factors relevant to the amount (or absence) of a fine for each of the Respondents and Lieu.
Lieu
  1. Lieu was young and naive. He was forthcoming and admitted his wrongdoing at an early stage in WFG’s investigation and was fully cooperative with WFG and the MFDA.
  1. He was sorry for his misconduct and told us that he realized he is not suitable for the securities industry and that he should seek a career in some other field.
  1. Staff advised that Lieu had extensively cooperated with staff throughout its investigation and during the preparations for disciplinary proceedings.
  1. In addition to admitting the facts and contraventions in the Lieu Settlement, he provided to staff substantial evidence pertaining to his and the branch’s practice of falsifying, fabricating or altering clients’ know-your-client information on account forms submitted to WFG, and information on loan applications and client documents submitted to lenders, in order to facilitate and obtain investment loans to purchase mutual funds for clients which loans and investments the clients did not otherwise qualify for.
  1. In addition, he agreed to testify against the Respondents.
  1. His testimony was revealing and helpful to the panel in understanding the scheme, the cover up, the business model, including the pyramid compensation arrangements at the branch, the understanding of the Respondents of the nature of the leverage investments they were selling, and the degree of involvement of others in the scheme.
  1. We were impressed that Lieu was forthcoming about his own involvement in the scheme, which he did not try to downplay or justify in any way. He may have been naive but he knew that what he was doing was wrong and against the rules. He knew that just because everybody at the branch was doing it, his misconduct was not justified or excusable.
  1. He was open about his motivation for co-operating fully with WFG and the MFDA at an early stage.
  1. He realized that the jig was up and that it was useless and would be counterproductive to try to cover up what had occurred. Also, he was concerned that the others might try to put sole blame on him since he was the go to person to alter or fabricate documents as instructed by others. He was concerned that the others might try “to throw me under the bus”. He realized that his best course of action was to make a complete confession and to co-operate fully.
  1. The panel agreed that it was appropriate in the circumstances that no fine or costs be payable by Lieu, and accordingly, the panel accepted the Lieu Settlement. We have issued a separate document for our decision and reasons for acceptance of the Lieu Settlement.
Tabesh
  1. Tabesh was discharged from bankruptcy in 2017. His assets are limited. His monthly income from a carpentry job is minimal. His wife is expecting their first child. His rent and other living expenses severely limit his ability to pay more than $500 per month for the foreseeable future.
  1. The joint submission in the Tabesh AFS requested a fine of $10,000 and costs of $5,000. Tabesh requested terms for payment of this in monthly instalments of $500 over a period of 30 months.
  1. Tabesh was the senior business person in the branch. Most if not all of the other Respondents were downline from him in the pyramid compensation arrangements.
  1. Lieu testified that if he had to identify the single person who ran the office, it would be Tabesh. He was the major decision maker in everything that happened in the office. He very much had the first say on what happened, and on what was not allowed to happen in the office.
  1. In view of the major role Tabesh played in the scheme and cover up, we believed the appropriate fine for him for allegations #1 and #2 was $15,000 (being $5,000 higher than the norm) and $20,000 (the norm) for allegation #3.
  1. We granted Tabesh terms to pay the fines, and costs of $5,000, at the rate of $500 per month for 60 months, without interest. The balance owing at the end of 60 months, namely $10,000, would then be due. If Tabesh defaults in making an instalment payment, the entire amount of fines and costs would become immediately due and payable.
  1. Our analysis of why we determined it not appropriate to accept the joint recommendation on penalty is set out below under the heading “Considerations on deference for the Tabesh ASF joint recommendation on penalty”.
Remaining Respondents
  1. None of the remaining Respondents advanced any special considerations or adduced evidence of the impact on them of the fines that might give us reason to reduce the amounts of the fines we otherwise determined were reasonable, appropriate, fair and consistent for them.

Fines set by the panel

  1. Appendix “3” sets out staff’s suggestion for fines for the Respondents other than Tabesh. If Tabesh is included, total fines recommended by staff amount to $1,295,000 and recommended costs amount to$32,500 for a total of $1,360,000.
  1. The fines suggested by staff are higher than warranted when compared with the size of fines in the precedent cases, taking into account the extent of the activity, the dollar amounts, client monetary losses, and benefits received, as well as any special factors relevant to the respondents in the various cases.
  1. Furthermore, the discrepancies in fines recommended for Tabesh and those for the other Respondents relative to allegations #1, #2, and #3 are not appropriate, fair or reasonably explainable.
  1. The fines for the Respondents set by the panel, which total $865,000 plus costs of $32,500 for all Respondents are:
    1. Attal: #1 & 2 $10,000; #3 $20,000; #4 $30,000; #6 $50,000; total $110,000
    2. Mustafa: #1 & 2 $15,000; #3 $20,000; #6 $50,000; total $85,000
    3. Rihawi: #1 & 2 $15,000; #3 $20,000; #6 $50,000; total $85,000
    4. Kolgekaya: #1 & 2 $15,000; #3 $20,000; #6 $50,000; total $85,000
    5. Ajmal: #1 & 2 $10,000; #3 $10,000; #6 $50,000; total $70,000
    6. Roomal: #1 & 2 $10,000; #3 $10,000; #5 $50,000; total $70,000
    7. Zobair: #1 & 2 $10,000; #3 $ 20,000: #5 $50,000; total $80,000
    8. Rawani: #1 & 2 $10,000; #3 10,000; #5 $50,000; total $70,000
    9. Masood: #1 & 2 $10,000; #3 $10,000; #5 $50,000; total $70,000
    10. Fortes: #1 & 2 $5,000; #3 $10,000;  #5  $25,000; total $40,000
    11. Pathan: #1 & 2 $5,000; #3 $10,000; #5 $50,000; total $65,000
    12. Tabesh: # 1& 2 $15,000; #3 $20,000; total $35,000

Considerations on deference for the Tabesh ASF joint recommendation on penalty

  1. Tabesh misled the MFDA and refused to cooperate until on the doorstep of the hearing.
  1. Staff advised that if the Tabesh ASF was withdrawn by Tabesh, it was ready to introduce additional evidence in an affidavit of Mr. Lambshead already prepared specific to his conduct and proceed with its original allegations against him. It appears that the investigation time and effort by staff had already been completed. However, the admissions in the Tabesh ASF at this stage of the process may have saved some hearing time.
  1. Unlike in criminal law matters where a defendant is under no obligation to defend himself, or to provide information to assist those investigating a crime, in investigations and proceedings by the MFDA a respondent has obligations.
  1. A respondent has a duty to co-operate with the MFDA in its investigation, to comply with requests for information, and to be truthful.
  1. A respondent has an obligation to reply to allegations against him and, truthfully, to admit or deny them.
  1. Tabesh did not file a Reply as required by the rules, and misled (although we did not take this into account when determining the appropriate fine for Tabesh) the MFDA until he agreed to the Tabesh ASF.
  1. Staff argued that the panel should give great deference to the joint recommendation on penalty and referred us to R v Anthony-Cook [2016] 2 S.C.R. 204 which put the test for approval of a joint submission on the penalty in a criminal proceeding as: “a trial judge should not depart from a joint submission on sentence unless the proposed sentence would bring the administration of justice into disrepute or is otherwise contrary to the public interest.”
  1. At paragraph 33 of Anthony-Cook the court stated, “A joint submission will bring the administration of justice into disrepute or be contrary to the public interest if, despite the public interest considerations that support imposing it, it is so ‘markedly out of line with the expectations of reasonable persons aware of the circumstances of the case that they would view it as a breakdown in the proper functioning of the criminal justice system’.”
  1. The panel determined that it should not apply a penalty to any Respondent which would appear to persons looking for the deterrent effect and the fairness, reasonableness and consistency of our administrative justice system to be inconsistent with the penalties applied to the other Respondents after taking into account reasonable, explicable and understandable differences.
  1. The panel determined that since the misconduct of the various Respondents and Lieu was based on common facts and circumstances, the penalties for them should generally be similar and consistent for each allegation, with any variation in penalty from the norm being explainable, appropriate, fair, and reasonable in all the circumstances. Otherwise, the results would not be in the public interest and the administration of justice would be brought into disrepute.
  1. For the reasons given above under the Fines, the panel decided it would not be appropriate to adopt the joint recommendation without variation.

PART  V.  MISCONDUCT: LAW

Allegations  #1 and #2 – False and misleading documentation and suitability

  1. MFDA Rule 2.1.1 prescribes the standard of conduct applicable to Members and Approved Persons. It states that each Member and Approved Person shall:
    1. deal fairly, honestly and in good faith with its clients;
    2. observe high standards of ethics and conduct in the transaction of business;
    3. not engage in any business conduct or practice which is unbecoming or detrimental to the public interest; and
    4. be of such character and business repute and have such experience and training as is consistent with the standards described in Rule 2.1.1, or as may be prescribed by the Corporation.
  1. MFDA Rule 2.1.1 is designed to protect the public interest by requiring Approved Persons to adhere to a high standard of ethical conduct. The Rule articulates the most fundamental obligations of all registrants in the securities industry.
  1. MFDA hearing panels have consistently held that an Approved Person contravenes the standard of conduct set out in MFDA Rule 2.1.1 when he or she completes account forms and loan applications with information which he or she knows, or ought to know, is false.
  1. The Respondents committed a fraud on their Member and on the lenders. In the words of the hearing panel in Arseneau, the Respondents’ conduct was “ so outrageously outside the bounds of the conduct required when promoting borrowing for leveraged investments and the very basic requirements to Know-Your-Client and determinations of suitability.”
  1. The Respondents’ conduct made it appear to WFG’s supervisory and compliance staff as though the clients satisfied WFG’s requirements regarding the use of leveraging. This conduct inhibited WFG’s ability to fulfill its supervisory obligations with respect to the suitability of investment loans.
  1. MFDA Rule 2.2.1 states:
    1. 2.2.1 “Know-Your-Client”. Each Member and Approved Person shall use due diligence:
      1. to learn the essential facts relative to each client and to each order or account accepted;
      2. to ensure that the acceptance of any order for any account is within the bounds of good business practice; and
      3. to ensure that each order accepted or recommendation made for any account of a client is suitable for the client and in keeping with the client’s investment objectives; and
      4. to ensure that, notwithstanding the provisions of paragraph (c), where a transaction proposed by a client is not suitable for the client and in keeping with the client’s investment objectives, the Member has so advised the client before execution thereof.
  1. This MFDA Rule codified the “Know-Your-Client” and “suitability” obligations recognized by securities regulators. Securities regulators have held that these obligations are “an essential component of the consumer protection scheme of [securities legislation] and a basic obligation of a registrant, and a course of conduct by a registrant involving a failure to comply with them is an extremely serious matter”.  A. Manning Ltd. et al (Re), 1995 LNONOSC 377 (OSC) (“E.A. Manning”) at p. 34; Daubney (Re), 2008 LNONOSC 338 (OSC) (“Daubney”) at para. 15; DeVuono (Re), [2012] MFDA Pacific Regional Council, MFDA File No. 201102, Hearing Panel Decision dated November 22, 2012 (Misconduct) (“DeVuono”) at para. 52,; and Pretty (Re), [2014] MFDA Atlantic Regional Council, Hearing Panel decision dated January 30, 2014 (“Pretty”) at para. 89.
  1. In Lamoureux, a hearing panel of the Alberta Securities Commission described the relationship between the “Know-Your-Client” and “suitability” obligations. The hearing panel stated that the “know your client” and “suitability” obligations are conceptually distinct but, in practice, they are so closely connected and interwoven that the terms are sometimes used interchangeably. The “Know-Your-Client” obligation is the obligation to learn about the client, their personal financial situation, financial sophistication and investment experience, investment objectives and risk tolerance. The “suitability” obligation is the obligation of a registrant to determine whether an investment is appropriate for a particular client.  Assessment of suitability requires both that the registrant understands the investment product and knows enough about the client to assess whether the product and client are a match. Lamoureux (Re), [2001] A.S.C.D. No. 613 (ASC) (“Lamoureux”) at pp. 11-12. DeVuono, supra at para. 53. Pretty, supra at para. 89.
  1. An Approved Person has an obligation to couple the recommendation to a client to invest in a certain product or strategy with disclosure to the client of all salient material relevant to the product or strategy including negative factors involved in the transaction, prior to executing a trade on the client’s behalf. A balanced presentation must be offered to the client in the interest of complete disclosure and relative objectivity. Lamoureux, supra at p. 19. Abrams in trust for Transpacific Sales Ltd. Sprott Securities Ltd. and Spork, [2003] O.J. No. 3900 (C.A.) at pp. 7-8 and 10.
  1. The Approved Person is obliged to properly explain all of the material risks of the leveraging strategy and the leveraging recommendation should not be supported by inaccurate or misleading representations. Mytting (Re), 2012 LNIIROC 45 (“Mytting”) at pages 17-18.
  1. It is particularly important that the Approved Person ensure the client understands the risks of borrowing monies to invest because leveraging can magnify the losses suffered by the client. Daubney, supra at paras 24-25.
  1. In addition, an Approved Person’s description of the risks of leveraging must take into account the possibility of a market downturn and the impact such a downturn would have on the leverage strategy. It ought to be reasonably foreseeable to any investment advisor that there might, at almost any time, be a market downturn that might prove to be of minor or major proportion and would impact, potentially substantially, the performance of a mutual fund.   Pretty, supra at para. 103. Rhoads Prudential-Bache Securities Canada Ltd., [1992] B.C.J. No. 153 at pp. 7-8.
  1. In the present case, the clients had limited to no investment knowledge or experience. The Respondents themselves did not appear always to have a proper understanding of the return of capital mutual fund they were selling as leveraged investments.
  1. The Respondents knew the clients did not meet WFG’s suitability criteria and deliberately and deceitfully falsified documents to hide this fact.
  1. By engaging in the misconduct, the Respondents acted contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #3 – Providing false information to WFG

  1. A Member is responsible for establishing, implementing and maintaining policies and procedures to ensure the handling of its business is in accordance with MFDA By-laws, Rules and Policies and with applicable securities legislation. WFG had policies and procedures requiring its Approved Persons to cooperate with it in investigating client complaints, among other things.
  1. An Approved Person is required to comply with the policies and procedures established, implemented and maintained by its Member, and to cooperate with the Member in its compliance investigations. The Respondents’ failure to do so in this case was conduct in breach of their standard of conduct under MFDA Rule 2.1.1.

Allegation #4 – Failure to supervise

  1. Attal was branch manager of the Mississauga branch. As such he had duties and supervisory obligations to ensure that the Respondents, including himself, complied with their regulatory obligations.
  1. The Respondents’ scheme was specifically aided and perpetuated by Attal who failed to fulfill his responsibilities as branch manager by deliberately failing to adequately supervise the other Respondents, and report to WFG that the Respondents (including himself) were falsifying, fabricating or altering client information and documents in order to obtain investment loans to purchase mutual funds, which prevented WFG from conducting a reasonable supervisory investigation and take such other supervisory measures as may have been warranted in the circumstances, contrary to MFDA Rules 2.5.1, 2.5.5, 1.I.2, and 2.1.1, and MFDA Policy No. 2.

Allegations #5 or #6 – Misleading or failing to cooperate with staff

  1. Under s. 22.1 of By-law No. 1 of the MFDA the Respondents had a duty not to mislead the MFDA in its investigation of them and to cooperate with the MFDA in its investigation.
  1. Either the Respondents failed to attend at interviews requested by staff (in the cases of Pathan, Roomal, Zobair, Rawani, and Masood), or they knowingly provided false and misleading answers to staff’s questions (in the cases of Rihawi, Mustafa, Attal, Ajmal, Kolgekaya, and Fortes).
  1. In the case of Fortes, though she misled staff at the beginning of her interview, after being confronted by staff with evidence of her misconduct, she eventually admitted what she and the other Respondents had done.
  1. The Respondents, other than Tabesh, misled or failed to cooperate with the MFDA, which constituted a contravention of section 22.1 of MFDA By-law No. 1 and MFDA Policy No. 2 as alleged in these allegations.

PART VI. PROCEDURE AND RELATED MATTERS

Joinder of Respondents into one matter

  1. The Notice of Hearing joins allegations against several persons into one matter. In view of the common facts and misconduct of the Respondents it was convenient and efficient to have the allegations against them joined into one matter. No Respondent objected or requested that his or her misconduct be dealt with separately.

Service of the Notice of Hearing

  1. On May 23, 2017 the MFDA issued a news release announcing that it had commenced this matter and published on its website a copy of the Notice of Hearing dated February 28, 2017.
  1. At the first appearance in this matter on June 7, 2017, staff provided an affidavit of service of the Notice of Hearing on the persons named as respondents in the Notice of Hearing and 13 other affidavits of service or attempted service. The chair of the panel reviewed the facts attested to in the affidavits and determined that good and sufficient service of the Notice of Hearing had been made on each of the Respondents in accordance with the requirements of the MFDA.

Effect of a failure to respond to the proceeding

  1. Section 20.4 of MFDA By-law No. 1 states:
    1. If a Member or person summoned before a hearing of a Hearing Panel by way of Notice of Hearing fails to:
      1. (a) serve a Reply in accordance with s. 20.2; or
      2. (b) attend at the hearing specified in the Notice of Hearing, notwithstanding that a reply may have been served;

      the Hearing Panel may proceed with the hearing of the matter on the date and at the time and place set out in the Notice of Hearing (or any subsequent date, at any time and place), without further notice to and in the absence of the Member or person, and the Hearing Panel may accept the facts alleged by the Corporation in the Notice of Hearing as having been proven by the Corporation and may impose any of the penalties described in Section 24.1.

  1. Rules 7.3 and 8 of the MFDA Rules of Procedures similarly empower a Hearing Panel, where a Respondent does not file a Reply or attend the hearing, to proceed with the hearing in the absence of a Respondent and accept the facts alleged and conclusions in the Notice of Hearing as proven.
  1. As previously mentioned, the panel proceeded with the hearing in the absence of the Respondents other than Tabesh. In addition, the panel, having regard to the other Respondents’ failure to file a Reply or otherwise respond to this proceeding, accepted as proven the facts alleged and conclusions against them drawn in the Notice of Hearing notwithstanding that staff adduced evidence to prove its case.

Penalty Argument

  1. Staff completed its case on the merits against the Respondents on May 17, 2018 and the panel made its decision on the merits.
  1. The hearing then adjourned to May 25, 2018 to hear argument on staff’s submission on penalties.
  1. The panel requested that Tabesh’s counsel be invited to the session on May 25 which staff did. Tabesh’s counsel advised she would not be attending the May 25 session. The panel requested the MFDA to advise Tabesh’s counsel that if she wished to adduce additional facts relevant to our penalty decision, or to make further submissions as to penalty, she should advise the MFDA and a session before the panel would be arranged. She did not make any request.

Costs

  1. Staff requested a costs award against Tabesh for $5,000. Staff requested a costs award of $2,500 against each of the other Respondent.
  1. In view of the time and effort expended by staff as evidenced in the testimony of Mr. Lambshead and the affidavits prepared by him for the hearing, and the length of time and number of interviews and other matters since the commencement of staff’s investigations until the conclusion of the hearing, the panel accepted as reasonable and appropriate the suggestions of staff for costs.

DATED: Nov 27, 2018

"Paul M. Moore, QC"

Paul M. Moore, QC

Chair


"Guenther W. K. Kleberg"

Guenther W. K. Kleberg

Industry Representative


"Joseph Yassi"

Joseph Yassi

Industry Representative

#623325


Appendix “1”

(Notice of Hearing)


Appendix “2”

(Agreed Statement of Facts)