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MFDA Case Summary

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Home › Case Summary 200711 - RE: Altimum Mutuals Inc.


Contact: Hugh Corbett
CASE SUMMARY #200711
Director of Litigation
July 17, 2007
Phone: 416-943-4685
Email: hcorbett@mfda.ca


MFDA Case Summary

Enforcement

This case summary was prepared by Staff of the MFDA.

Hearing Panel approves Settlement Agreement with Altimum
Mutuals Inc.


Nature of
A Hearing Panel of the Central Regional Council of the Mutual Fund
Proceeding
Dealers Association of Canada (“MFDA”) has approved a Settlement
Agreement between the MFDA and Altimum Mutuals Inc.
(“Altimum”).

By-Laws,
The Hearing Panel considered the Settlement Agreement at a hearing
Rules, Policies held on June 15, 2007 in Toronto. Under the Settlement Agreement,
Violated
Altimum admitted that it acted contrary to the public interest by

contravening MFDA Rules 2.7.2 and 2.1.1(c) by distributing
misleading sales communications to clients.

Advertising and Sales Communications

MFDA Rule 2.7.2 states that:

No Member shall issue to the public, participate in or knowingly allow
its name to be used in respect of any advertisement or sales
communication in connection with its business which:

(a) contains any untrue statement or omission of a material fact or
is otherwise false or misleading, including the use of a visual
image such as a photograph, sketch, drawing, logo or graph
which conveys a misleading impression;

(b) contains an unjustified promise of specific results;
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(c) uses unrepresentative statistics to suggest unwarranted or
exaggerated conclusions, or fails to identify the material
assumptions made in arriving at these conclusions;

(d) contains any opinion or forecast of future events which is not
clearly labeled as such;

(e) fails to fairly present the potential risks to the client;

(f) is detrimental to the interest of the public, the Corporation or
its Members; or

(g) does not comply with any applicable legislation or the
guidelines, policies or directives of any regulatory authority
having jurisdiction over the Member.

Standard of Conduct

MFDA Rule 2.1.1 states that:

Each Member and each Approved Person of a Member shall:

(a) deal fairly, honestly and in good faith with its clients;

(b) observe high standard of ethics and conduct in the transaction
of business;

(c) not engage in any business conduct or practice which is
unbecoming or detrimental to the public interest; and

(d) be of such character and business repute and have such
experience and training as is consistent with the standards
described in this Rule 2.1.1, or as may be prescribed by the
Corporation.

Altimum paid a fine of $10,000, imposed pursuant to MFDA By-Law
No. 1, Section 24.1.1(b).

Summary of
Altimum is registered as a mutual fund dealer and a limited market
Facts
dealer in Ontario. Altimum has been a Member of the MFDA since
May 29, 2003.

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On or about July 18, 2003, Altimum entered into a referral arrangement
with Portus Alternative Asset Management Inc (“Portus”). The
Agreement provided that Portus would pay Altimum’s referral fees
based on the amount of assets invested by their clients in Portus
securities.

Between December 2003 and January 2005, the Respondent received
approximately $117,000 in referral fees from Portus under the terms of
the agreement.

In February 2005, the Ontario Securities Commission issued orders
requiring Portus and its affiliates to cease trading in securities because
of apparent breaches of the Securities Act, R.S.O. 1990, c. S.5 as
amended. Bankruptcy and enforcement proceedings were commenced
against Portus.

Securities dealers that referred clients to Portus in Ontario, including
Altimum voluntarily agreed to terms and conditions on their
registration stipulating that the Ontario Dealers would repay clients all
referral fees received from Portus. In January 2006, Altimum repaid
approximately $117,000 in referral fees to its clients.

In March 2004, Altimum produced two pamphlets for the purpose of
soliciting investments by clients in Portus securities and similar exempt
securities. The features attributed to the investments described in the
pamphlets were based primarily upon Altimum’s understanding of
Portus securities.

One of the pamphlets purported to promote an investment product
referred to as the Retirement Security Investment Plan (“R.S.I.P.”).
Altimum had obtained a registered trademark for the term R.S.I.P. prior
to publishing the pamphlet. The other pamphlet described and
promoted the merits of what appeared to be a unique investment tool,
software or methodology called the Portfolio navigator. Neither the
R.S.I.P nor the Portfolio Navigator investment process existed. Both
concepts were the creation of Altimum designed to induce clients to
invest in Portus securities. The pamphlets did not acknowledge that
Portus was the issuer of the underlying investments being promoted.
The RSIP pamphlet constituted a misleading sales communication
issued to the public because it contained untrue or misleading
statements, contrary to MFDA Rule 2.7.2(a), as it stated or implied that
an RSIP:
(a) “is the perfect Retirement Security Investment Plan”;
(b) “was created for those 55 years of age and older who want to
stop taking so much risk with their retirement funds”;
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(c) “was designed to replace G.I.C.’s in a portfolio”;
(d) features benefits such as positive and consistent returns and
broad diversification; and
(e) operates such that an investor’s “$10,000 portfolio will be
constructed in the same way as a $20,000,000 portfolio of a
pension fund in Toronto if both are invested on the same day.
Both portfolios will hold exactly the same investments in
exactly the same proportions and both investors will pay
exactly the same fees.”
(f) is recognized by the Canadian government as an alternative to
a Registered Retirement Savings Plan (“R.R.S.P.”) by:
i. expressly contrasting an R.S.I.P. to an R.R.S.P. in a manner
that suggested both were retirement investment savings
vehicles sanctioned by the government;
ii. making use of a similar acronym, accompanied in places by
a red maple leaf;
iii. stating that the RSIP was designed for individuals investing
for their retirement years and seeking a tax advantaged
return; and
iv. including a maple leaf on the cover of the pamphlet in a
manner which suggested that the R.S.I.P. was an
investment product sanctioned by the government.
(g) is a unique investment product and the Respondent is one of a
select group of investment dealers authorized to offer it to
investors, and stated that “[a]n R.S.I.P. is not available from
your local bank … credit union … trust company …[or]
insurance agent” and “[m]any investment dealers are not yet
authorized to offer an R.S.I.P.” because they have “to meet
certain minimum standards” and “stringent requirements in
terms of education, experience and amount of money under
management” when in fact the pamphlet was a marketing tool
to promote sales of Portus securities which were widely
available for purchase from any one of the other sources
referred to in the pamphlet and the Respondent had not
satisfied any unique or stringent standards to become eligible
to offer Portus securities to its clients.
(h) The pamphlet contained unjustified promises of specific
results, contrary to Rule 2.7.2(b), including “a nice, steady
return of about 9% per year without a lot of volatility” and
“steady growth higher than the rate of interest on G.I.C.’s”.
The RSIP Pamphlet failed to present the potential risks of investing in
Portus securities, contrary to Rule 2.7.2 (e).
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The Portfolio Navigator Pamphlet constituted a misleading sales
communication that was issued to the public contrary to MFDA Rule
2.7.2 because:
(a) The pamphlet contained untrue or misleading statements,
contrary to Rule 2.7.2(a), as it stated or implied that:
i. “[Our elite managers] can make money whether the
market is going up or down….Your portfolio is managed
to generate a smooth, reliable rate of return that is
significantly higher than fixed income investments” when
there was no reasonable basis for making such claims;
ii. “Portfolio Navigator” is a special tool, software or
methodology that is used exclusively by the Respondent
when, in fact, the term “Portfolio Navigator” was
conceived of by the Respondent and incorporated into the
Respondent’s marketing pamphlet to promote interest
among the Respondent’s clients in securities issued by
Portus which were widely available from other market
participants;
iii.
“We use something called Portfolio Navigator to tell us
when to buy and sell. It is a process in which tools are
applied to your portfolio on a daily basis, to make sure
that you are investing only when the risk is low and that
you are selling when the risk in the market is high” when
no such tool was being applied to the Respondent’s client
portfolios and there was no basis for describing the
administration of Portus securities in that manner;
(b) The Respondent is registered as an IC/PM and actively
manages the underlying investments as the Respondent is the
only corporate entity referred to in the pamphlet and the
pamphlet states among other things that:
i.
“With Portfolio Navigator as a guide, we invest for you”;
ii.
includes frequent references to “Our elite managers” who
make use of “technical analysis”, “short selling, leverage,
market timing and hedging” and “active, discretionary
money management techniques, aiming to improve the
performance of your portfolio while systematically
reducing risk”; and

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iii. “We don’t bother you with the day-to-day decisions. Our
elite managers take whatever initiative is necessary and
make all of the trading decisions for you;”
(c) The pamphlet makes no reference to any potential risks to a
client who wishes to participate in the Portfolio Navigator
investment strategy, contrary to Rule 2.7.2 (e).
The Respondent sent the RSIP Pamphlet and the Portfolio Navigator
Pamphlet to approximately 150 clients and displayed the pamphlets in
one of its offices and on its website, where clients or potential clients
could obtain copies.
Of the total amount of $3.3 million invested in Portus securities by
clients of the Respondent, more than $2,750,000 was invested by
approximately 70 of the 150 clients to whom the Respondent mailed
copies of the pamphlets.

The pamphlets remained on display and available on the Respondent’s
website until MFDA Staff raised concerns about the pamphlets during a
sales compliance review of the Respondent in February 2005. After
being advised of MFDA Staff concerns, the Respondent voluntarily
discontinued further distribution of the pamphlets.

DM#115406v2
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