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Case Summary

Enforcement

This case summary was prepared by Staff of the MFDA.

Hearing Panel Imposes Penalties on W.H. Stuart Mutuals Ltd., Marilyn Dianne Stuart and Walter Howard Stuart

After obtaining interim orders from an MFDA Hearing Panel against W. H. Stuart Mutuals Ltd. (“W. H. Stuart”) and Marilyn Dianne Stuart (“Dianne Stuart”) in April and May 2013 pursuant to s. 24.3 of MFDA By-law No. 1 in MFDA Hearing File No. 201308 (the “s. 24.3 Proceeding”), MFDA Staff commenced a disciplinary proceeding against W.H. Stuart, Diane Stuart, and Walter Howard Stuart (“Howard Stuart) in November 2014.

In its reasons for decision re misconduct, the Hearing Panel stated that the evidence presented by MFDA Staff “revealed that Dianne Stuart and W. H. Stuart engaged in a massive scheme of dishonesty over a period of approximately 10 years or more. At its core was the falsification and concealment of records, and a pattern of deceit. The scheme represented a gross breach of trust and fiduciary responsibility, and resulted in losses in the millions of dollars. The efforts taken to disguise this scheme of dishonesty from the MFDA and other regulators, auditors, investors, and others were truly staggering in their breadth, duration and level of sophistication.”

The Hearing Panel determined that between March 26, 2003 (when W. H. Stuart became a Member of the MFDA) and May 2013, Diane Stuart and W.H. Stuart solicited, obtained and failed to repay or otherwise account for approximately $6 million from more than 180 clients for investment in promissory notes offered by “W. H. Stuart & Associates”, a registered trade name of W. H. Stuart that purportedly ‘guaranteed’ the principal amount invested and would pay investors interest that was usually specified as 7% per year (the “Note Program”). Instead of depositing the amounts solicited in W. H. Stuart’s trust account, the money was deposited into other bank accounts that Dianne Stuart controlled including bank accounts of related companies. Dianne Stuart used the money solicited to sustain the operations of W. H. Stuart and related companies, to address significant financial difficulties that Dianne Stuart was facing including substantial litigation expenses that she was incurring or otherwise for her direct or indirect benefit. Between 2009 and 2013, Diane Stuart also arranged for an unregistered person to solicit the participation of clients of W.H. Stuart in the Note Program.

In May 2013, following the commencement of the s. 24.3 Proceeding by MFDA Staff and with appropriate regulatory approval, an asset purchase agreement was signed that resulted in the transfer of W. H. Stuart’s client accounts and Approved Persons to Keybase Financial Group Inc., another Member of the MFDA. Shortly after those accounts were transferred, it became apparent that there were insufficient assets available to satisfy the liabilities of W. H. Stuart including liabilities associated with the Note Program. On September 18, 2013, a bankruptcy order was made against W. H. Stuart and a Trustee in Bankruptcy was appointed. By soliciting money from clients by means of the Note Program and failing to repay them, Dianne Stuart and W. H. Stuart failed to deal fairly, honestly and in good faith with the clients and engaged in conduct unbecoming a Member and Approved Person, contrary to MFDA Rule 2.1.1 and engaged in personal financial dealings with clients which gave rise to a conflict of interest that they failed to ensure was addressed by the exercise of responsible business judgment influenced only by the best interests of the clients, contrary to MFDA Rules 2.1.4 and 2.1.1.

The MFDA Investor Protection Corporation (the “IPC”) implemented a claims process to compensate clients who incurred losses attributable to the bankruptcy and insolvency of W. H. Stuart. As of February 4, 2016, the IPC had paid out more than $6 million in compensation in connection with approximately $8.4 million in claims for compensation related to the Note Program. The compensation paid out likely underestimates the total losses associated with the Note Program given limits applicable to IPC’s coverage.

The Hearing Panel determined that Diane Stuart and W.H. Stuart actively concealed the existence of the Note Program from external auditors, the MFDA, other regulators and many employees of W.H. Stuart by: (a) deliberately not recording any transactions, liabilities or other information associated with the Note Program in books and records of W.H. Stuart; (b) preparing records of the Note Program that were maintained separately from the records of W. H. Stuart and actively concealed; and (c) falsifying, altering, concealing and withholding relevant records and information contrary to MFDA Rule 5, MFDA Policy No. 4 and MFDA Rule 2.1.1. Among other things, Dianne Stuart manipulated access to and content in records on the back office system of W. H. Stuart which was developed and controlled by S21C Technologies, another company that Dianne Stuart and Howard Stuart founded and operated and she took measures to ensure the unavailability to MFDA Staff of a person with damaging knowledge of the Note Program and her alteration of records.

The Hearing Panel made findings that Diane Stuart and W.H. Stuart misappropriated or otherwise failed to account for more than $800,000 unrelated to the Note Program that was invested with or held in accounts at W. H. Stuart of more than 30 clients, contrary to MFDA Rules 2.1.1 and 2.3.1. In multiple cases, Diane Stuart and W. H. Stuart processed unauthorized transactions in client accounts whereby client fund holdings were redeemed by submitting paperwork with falsified client signatures directly to the fund companies and depositing the proceeds from the redemptions into bank accounts of related companies that Dianne Stuart controlled. On occasions when the clients contacted W. H. Stuart about such transactions, Dianne Stuart claimed falsely that the transactions had been processed in error and repurchased for the clients the investments that had been sold without their authorization. Client complaints regarding unauthorized redemptions were not reported to the MFDA contrary to MFDA Policies 3 and 6.

The Hearing Panel also determined that Diane Stuart and W.H. Stuart contravened orders of an MFDA Hearing Panel that were made during the s. 24.3 Proceeding. Among other things, Dianne Stuart failed to end her involvement with banking in relation to W. H. Stuart and related companies, she failed to stop processing trades through W. H. Stuart’s back office system, disregarded early warning requirements, failed to produce or facilitate access to banking records of W. H. Stuart and related companies, and in some cases failed to transfer client assets or the proceeds from the sale of client assets to Keybase or to otherwise account for such client assets. The Hearing Panel determined that Diane Stuart and W.H. Stuart contravened section 22.1 of MFDA By-law No. 1 and MFDA Rule 2.1.1 and stated that the irresistible inference to be drawn from these contraventions is that Dianne Stuart had no regard for the authority of the regulator, showed no good faith in addressing the difficulties caused by her own conduct, and exhibited no remorse for her extremely serious misconduct.

The Hearing Panel also concluded that between 2004 and 2013, Diane Stuart and W.H. Stuart failed to disclose any of the liabilities associated with the Note Program to the MFDA or to its auditors and failed to: (a) file accurate and complete monthly financial reports to the MFDA and annual audited financial reports contrary to MFDA Rules 3.5.1 and 2.1.1 and MFDA Policy No. 4; (b) ensure that W.H. Stuart maintained the minimum capital required of a Level 4 dealer, contrary to MFDA Rule 3.1.1; (c) segregate cash and other client property from the property of Diane Stuart and W.H. Stuart, contrary to MFDA Rules 3.3 and 2.1.1 and MFDA Policy No. 4; (d) implement adequate internal controls, contrary to MFDA Rule 2.9; and (e) ensure accurate financial records were maintained by W.H. Stuart, contrary to MFDA Rule 5, MFDA Policy No. 4, and MFDA Rule 2.1.1.

Up until May 15, 2013, Howard Stuart held the title of President and Chief Executive Officer of W. H. Stuart and was a director of W. H. Stuart. During the investigation of this matter, Dianne Stuart informed MFDA Staff that Howard Stuart had knowledge of the Note Program but he had limited involvement in the day-to-day management and operations of W. H. Stuart and its affiliates after he and Dianne Stuart separated as husband and wife in approximately 2007. He continued to receive monthly payments of at least $7,500 per month until approximately May 2013. Between November 2013 and January 2014, MFDA Staff exchanged correspondence with Howard Stuart in order to schedule an interview and MFDA Staff was prepared to be accommodating in how, when and where Howard Stuart would be interviewed. The Hearing Panel determined that Howard Stuart deliberately chose not to cooperate with the MFDA’s investigation by failing to attend an interview and give information with regard to the investigation, contrary to section 22.1 of MFDA By-law No. 1 and MFDA Rule 2.1.1.

In its reasons for decision (Penalty), the Hearing Panel concluded that Dianne Stuart’s conduct falls at the most serious end of the spectrum of wrongdoing. She was a prime architect of a sophisticated, lengthy scheme involving deliberate dishonesty, and resulting in millions of dollars of losses. Accordingly, the Hearing Panel imposed a permanent prohibition on her authority to conduct securities related business in any capacity with a Member of the MFDA, a fine in the amount of $7 million and costs of $50,000.

Although Howard Stuart did not face the substantive allegations proven against Dianne Stuart and W. H. Stuart, this may be explained, at least in part, by his deliberate choice not to cooperate with the MFDA, and the MFDA’s inability, as a result to have a complete understanding of his role. The Hearing Panel was mindful of the need to ensure that there is little or no incentive for refusing to cooperate with an ongoing investigation and determined that his failure to cooperate was very serious. The Hearing Panel imposed a permanent prohibition on Howard Stuart’s authority to conduct securities related business in any capacity with a Member of the MFDA, he is jointly liable with Dianne Stuart for the first $1 million of her $7 million fine and he is jointly liable with Dianne Stuart for $50,000 in costs.

The Hearing Panel stated that to the extent that MFDA Enforcement Counsel is satisfied that the Respondents have made restitution in any related legal proceeding to those who have incurred losses, including the IPC, the fines imposed in this case shall be reduced accordingly, and equally as between Dianne Stuart and Howard Stuart.

The Hearing Panel determined that no fine should be imposed on W. H. Stuart in light of its status as a bankrupt company with no ability to pay or any prospect whatsoever that it will ever be in a position to do so. Absent these circumstances, a multi-million fine would have been imposed. Given its corporate liability, its connection to the individual Respondents, and its current status, the Hearing Panel did order the termination of W. H. Stuart’s membership in the MFDA.

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NOTICE: This case summary has been prepared by Staff of the MFDA, based upon the previously published Decision and Reasons of an MFDA Hearing Panel presiding over this matter. Every effort is made to ensure that this case summary accurately reflects the content of the Decision and Reasons. However, where there is a discrepancy between this case summary and the Decision and Reasons, the Decision and Reasons will prevail.