Hearing Panel imposes permanent prohibition, fine of $51,500 and costs of $5,000 on Scott C. Armstrong
Nature of Proceeding
A Hearing Panel of the Atlantic Regional Council of the Mutual Fund Dealers Association of Canada (“MFDA”) has imposed disciplinary penalties on Scott C. Armstrong (“the Respondent”), a former Approved Person of the MFDA.
By-Laws, Rules, Policies Violated
The hearing on the merits (the “Hearing”) was conducted on July 6, 7 and 8, 2011, and then scheduled to continue from August 22 to 26, 2011. On August 19, 2011, the Respondent and Staff of the MFDA entered into an Agreed Statement of Facts, in which the Respondent admitted the facts and misconduct set out below. On August 23, 2011, the Hearing resumed and the Hearing Panel, based upon the admissions contained in the Agreed Statement of Facts, found that:
- between about 2007 and 2008, the Respondent facilitated an investment by client AL in the amount of $40,000 in a corporation, AFS Services Inc. (“AFS”), in which the Respondent had a direct or indirect interest, in a manner which preferred his own interests over those of client AL and which failed to deal with client AL fairly, honestly and in good faith, contrary to MFDA Rules 2.1.4 and 2.1.1;
- between about 2007 and 2008, the Respondent induced client AL to sign an agreement whereby client AL released any claim to ownership of shares of AFS and resigned as an officer or director of AFS in exchange for the Respondent promising to pay client AL $62,000, which the Respondent subsequently failed to do, thereby preferring his own interests over those of client AL and failing to deal fairly, honestly and in good faith with client AL, contrary to MFDA Rules 2.1.4 and 2.1.1; and
- between 2007 and 2008, the Respondent engaged in personal financial dealings with client AL by signing a promissory note in the amount of $62,000 payable by him to client AL in satisfaction of debts owed primarily by AFS and Gateway Capital Growth Inc. (“Gateway”) to client AL and thereafter failing to pay client AL in accordance with the terms of the promissory note, contrary to MFDA Rules 2.1.4 and 2.1.1.
MFDA Rule 2.1.4 states:
Conflicts of Interest.
- Each Member and Approved Person shall be aware of the possibility of conflicts of interest arising between the interests of the Member or Approved Person and the interests of the client. Where an Approved Person becomes aware of any conflict or potential conflict of interest, the Approved Person shall immediately disclose such conflict or potential conflict of interest to the Member.
- In the event that such a conflict or potential conflict of interest arises, the Member and the Approved Person shall ensure that it is addressed by the exercise of responsible business judgment influenced only by the best interests of the client and in compliance with Rules 2.1.4(c) and (d).
- Any conflict or potential conflict of interest that arises as referred to in Rule 2.1.4(a) shall be immediately disclosed in writing to the client by the Member, or by the Approved Person as the Member directs, prior to the Member or Approved Person proceeding with the proposed transaction giving rise to the conflict or potential conflict of interest.
- Each Member shall develop and maintain written policies and procedures to ensure compliance with Rules 2.1.4(a), (b) and (c).
MFDA Rule 2.1.1 states:
Standard of Conduct. Each Member and each Approved Person of a Member shall:
- deal fairly, honestly and in good faith with its clients;
- observe high standards of ethics and conduct in the transaction of business;
- not engage in any business conduct or practice which is unbecoming or detrimental to the public interest; and
- 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.
The Hearing Panel ordered the following penalties:
- the Respondent shall be permanently prohibited from conducting securities related business in any capacity over which the MFDA has jurisdiction, which will be reduced to a 5 year prohibition if client AL is repaid the sum of $51,500 by the Respondent on or before December 31, 2013;
- the Respondent shall pay a fine in the amount of $51,500, which will be reduced to a fine in the amount of $10,000 if client AL is repaid the sum of $51,500 by the Respondent on or before December 31, 2013; and
- the Respondent shall pay costs in the amount of $5,000.
Summary of Facts
Client AL Invests in AFS
Prior to August 2008, the Respondent was a controlling mind of AFS. Client AL was a client of AFS and the Respondent was the mutual fund salesperson responsible for serving his account.
In 2007, the Respondent facilitated an investment by client AL in the amount of $40,000 in AFS. Client AL invested in AFS based upon the Respondent’s representation that an agreement (the “Share Purchase Agreement”) had been reached with the existing shareholders of AFS, whereby:
- AFS would buy back the shares held by 7 of the 11 existing shareholders of AFS, representing approximately 405 of the 460 outstanding shares of the company;
- client AL would purchase 300 shares issued by AFS at a price of $40,000;
- the Respondent would purchase 330 shares issued by AFS at a price of $50,000; and
- client AL would become the President of AFS.
The Respondent led client AL to believe that, following the completion of the Share Purchase Agreement, client AL and the Respondent together own and operate AFS.
The Respondent preferred his own interests to those of client AL, and failed to deal with client AL fairly, honestly and in good faith, when he:
- after receiving and depositing client AL’s investment monies, did not take steps to ensure that AFS issued shares to client AL in accordance with the terms of the Share Purchase Agreement;
- failed to ensure that client AL was permitted to become the President of AFS and, instead, remained in control of AFS himself;
- failed to purchase any shares of AFS or otherwise invest $50,000 in AFS, and did not inform client AL that he had not carried through on his obligations under the Share Purchase Agreement; and
- without the knowledge of client AL, received payments of at least $50,000 from AFS between November 2007 and March 2008, some of which were authorized by the Respondent and taken from the same account into which client AL’s investment monies had been deposited.
The Respondent Induces Client AL to Sign a Release
In about March 2008, the Respondent advised client AL that AFS would soon become bankrupt unless the company was purchased by an individual, LH.
To facilitate the purchase of AFS by LH, the Respondent requested that client AL sign an agreement releasing any claim to ownership of shares of AFS and resigning as an officer and director of AFS (the “Release”). The Respondent advised client AL that his investment would be repaid once LH purchased AFS, and LH would not purchase AFS unless client AL signed the Release.
Client AL refused to sign the Release until he received some form of payment for his investment in AFS. To induce client AL to sign the Release, the Respondent offered to sign a promissory note in the amount of $62,000 payable by the Respondent personally to client AL, and provide client AL with an immediate payment in the amount of $10,000.
The Respondent represented to client AL that he had sufficient assets to pay the full amount of the proposed promissory note. This representation was false, misleading or contained material omissions as the Respondent had insufficient assets to pay his then existing debts of at least $522,000.
The Respondent Signs a Promissory Note Payable to Client AL
On May 7, 2008, the Respondent signed a promissory note in the amount of $62,000 payable by the Respondent to client AL (the “Promissory Note”). This amount represented the repayment of client AL’s investment in AFS and an earlier investment in a car repair shop which the Respondent had also facilitated. The Promissory Note was due to be paid in full by June 7, 2008.
The Respondent subsequently delivered a cheque dated May 7, 2008 in the amount of $10,000 payable by AFS to client AL, which was co-signed by the Respondent. At the time client AL received the cheque, he signed and delivered the Release. With the exception of one payment in the amount of $500, the Respondent did not make any further payments to client AL.
On August 20, 2008, LH purchased 665 of the 685 outstanding shares of AFS for a total of $66.50 or $0.10 per share. Client AL was not paid any amounts following the purchase of AFS by LH.
On October 20, 2008, client AL commenced a civil action in the Court of Queen’s Bench of New Brunswick against the Respondent claiming the sum of $51,500 (i.e. the unpaid portion of the Promissory Note). On December 1, 2008, the Respondent filed for bankruptcy under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. On December 3, 2008, client AL obtained Judgment against the Respondent in the amount of $51,500 and costs of $629.10. Client AL has not received any payments on account of the Judgment.
For greater detail, see the Agreed Statement of Facts dated August 19, 2011 and the Decision and Reasons dated September 2, 2011, posted on the MFDA’s website in the “Enforcement” section under “Completed Cases”.