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Decision and Reasons

Re:

Decision and Reasons


Decision and Reasons (Penalty)
File No. 201532



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: W.H. Stuart Mutuals Ltd., Marilyn Dianne Stuart and
Walter Howard Stuart

Heard: April 29, 2016 in Toronto, Ontario
Decision and Reasons (Penalty): May 16, 2016


DECISION AND REASONS
(Penalty)


Hearing Panel of the Central Regional Council:

Mark J. Sandler
Chair

Kenneth P. Mann
Industry Representative

Vasant Pachapurkar
Industry Representative

Appearances:

Shelly Feld
)
Counsel for the Mutual Fund Dealers

Paul Blasiak
)
Association of Canada
)

No one appearing for the
)

Respondents
)

)

)

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Introduction

1.
On November 27, 2014, the Mutual Fund Dealers Association of Canada (the “MFDA”)
issued a Notice of Hearing respecting three Respondents: W.H. Stuart Mutuals Ltd. (“W.H.
Stuart” or “the Member”), Marilyn Dianne Stuart (“Dianne Stuart” or “Ms. Stuart”) and Walter
Howard Stuart (“Howard Stuart” or “Mr. Stuart”). The Notice contained the following
allegations:

Allegation #1: Between March 26, 2003 and May 2013, Dianne Stuart and W.H. Stuart
solicited and accepted approximately $6 million from more than 180 clients purportedly to be
invested on their behalf (the “Note Program”), which monies they failed to repay or
otherwise account for.

Allegation #2: Between March 26, 2003 and May 2013, Dianne Stuart and W.H. Stuart
actively concealed the activity in Allegations #1 and #3 from others at W.H. Stuart, external
auditors, the MFDA and other regulators.

Allegation #3: Between March 26, 2003 and May 2013, in addition to failing to repay or
otherwise account for the monies invested in the Note Program described in Allegation #1,
Dianne Stuart and W.H. Stuart misappropriated or have otherwise failed to account for more
than $800,000 of investments and monies from over 30 clients.

Allegation #4: Dianne Stuart and W.H. Stuart failed to comply with interim orders of a
Hearing Panel of the MFDA with respect to the matters in Allegations #1 and #3 above.

Allegation #5: Between March 26, 2003 and May, 2013, in the course of sustaining the Note
Program described in Allegation #1, Dianne Stuart and W.H. Stuart failed to file accurate and
complete financial reports, maintain minimum capital, segregate cash and property of W.H.
Stuart clients, implement adequate internal controls or maintain accurate financial records.

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Allegation #6: Commencing November 21, 2012, Howard Stuart failed to cooperate during
the course of an investigation by failing to attend an interview requested by Staff to provide a
statement and give information about the matters under investigation.

2.
On February 16, 2016, the hearing into the merits of these allegations took place. In our
Decision and Reasons dated April 25, 2016, we found that all of the allegations had been proven.

3.
The hearing proceeded in the absence of the Respondents. In our earlier Reasons, we
concluded that the Respondents had chosen not to participate in these proceedings, and set out
our jurisdiction to proceed in their absence, and why it was appropriate to do so.

4.
We set April 29, 2016 for submissions as to penalty. The Respondents again had the full
opportunity to participate at the penalty phase of the hearing, but chose not to do so. It remained
appropriate to consider the issue of penalty in their absence.

5.
At the penalty hearing, Enforcement Counsel relied upon the evidence already placed
before the Hearing Panel, together with written and oral submissions. Counsel also drew our
attention to two prior decisions of the Alberta Securities Commission pertaining to all of the
same Respondents.

6.
At the conclusion of the penalty hearing, we ordered that effective immediately:

(a) the Membership of W.H. Stuart in the MFDA is terminated;
(b) Dianne Stuart is permanently prohibited from conducting securities related business
in any capacity as an Approved Person of, or in association with, any Member of the
MFDA;
(c) Howard Stuart is permanently prohibited from conducting securities related business
in any capacity as an Approved Person of, or in association with, any Member of the
MFDA;
(d) The Respondents Dianne Stuart and Howard Stuart are jointly and severally required
to pay costs of the MFDA totaling $50,000.
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7.
We also indicated that we intended to impose a fine or fines on both Dianne Stuart and
Howard Stuart, but not 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. The Trustee in
Bankruptcy confirmed that no funds were available for distribution to pay liabilities owed to
ordinary unsecured creditors of W.H. Stuart. W.H. Stuart has been inactive and the subject of a
suspension order for some time. Absent these circumstances, we would have undoubtedly
imposed a multi-million dollar fine on W.H. Stuart to reflect the scope, duration and seriousness
of its misconduct, the sophisticated, calculated deceit by at least one of its directing minds, and
the large losses incurred as a result of that misconduct.

The Facts

8.
It is unnecessary for us to repeat the detailed findings of fact contained in our earlier
Decision and Reasons. However, we will briefly allude to several of those findings to explain the
penalty imposed on each Respondent.

Discipline History

9.
In 1999, W.H. Stuart, Dianne Stuart and Howard Stuart were all respondents in
proceedings before the Alberta Securities Commission (the “ASC”). At that time, W.H. Stuart
was registered as a mutual fund dealer in Alberta, though its head office (then and more recently)
was in Toronto. Howard Stuart was the President and Chief Executive Officer of the dealer, and
Dianne Stuart was its Secretary-Treasurer and Compliance Officer.

10.
The allegations before the ASC related to the sale of limited partnership units to
purchasers in Alberta without a prospectus. Pursuant to Alberta securities legislation, individuals
had to purchase a minimum of $97,000 worth of these units to qualify for certain prospectus and
registration exemptions. Of significance, the threshold under British Columbia securities
legislation was $25,000. The ASC concluded that Dianne Stuart orchestrated a scheme to have
subscription documents completed with false information to make it appear as if the sales had
been facilitated by a sales agent in W.H. Stuart’s Kelowna, British Columbia office. In fact, the
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Alberta investors had never met this sales agent. Indeed, the address of the Kelowna office of
W.H. Stuart was filled in as each investor’s address. Prior to the hearing, Dianne Stuart had
provided conflicting versions of the events in an effort to avoid responsibility. Given Dianne
Stuart’s position with W.H. Stuart at the time and the finding that she deliberately attempted to
circumvent Alberta law, the ASC regarded her actions to fall within the most serious category of
violations.

11.
The ASC also concluded that the registered salespersons of W.H. Stuart, a mutual fund
dealer, sold exempt securities without the requisite approval of the ASC. As well, some sales
were made through employees who were only registered to sell life insurance.

12.
The ASC ordered that Ms. Stuart resign any positions she held as a director or officer, or
both, of any issuer/registrant, and prohibited her from becoming or acting as a director or officer,
or both, of any issuer/registrant.

13.
The ASC held that W.H Stuart was responsible for the violations because the unlawful
sales were made through its employees, facilitated by Ms. Stuart. It delegated its compliance
responsibility to Ms. Stuart. the ASC fined W.H. Stuart $150,000 and ordered, as a condition of
W.H. Stuart’s registration, that Dianne Stuart not be employed by W.H. Stuart in any capacity,
except with the prior written consent of the ASC’s Executive Director.

14.
All three respondents acknowledged their responsibility for the regulatory violations. Mr.
Stuart’s responsibility stemmed from his position as President and Chief Executive Officer of
W.H. Stuart. The ASC concluded, however, that there was no evidence showing any
involvement by him in the plan to circumvent Alberta law. He was fined $25,000. All of the
respondents were ordered to pay the costs of the investigation and hearing.

15.
In 2011, W.H. Stuart entered into a Settlement Agreement with the MFDA in which it
admitted that prior to February 28, 2009, it failed to establish, implement, maintain and adhere to
adequate policies and procedures to ensure that adequate trade supervision was being conducted
and that evidence of trade supervision was being maintained. It also admitted that between
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February 12, 2009 and September 28, 2009, it breached early warning restrictions that were
applicable to it by paying a bonus to Howard Stuart and by making a direct or indirect payment
to a related party, Stuart Insurance, without the MFDA’s prior written consent. W.H. Stuart was
fined $45,000 and ordered to pay a modest costs award.

16.
The prior disciplinary record, particularly in Alberta, is significant. It shows that Dianne
Stuart engaged in a prior deliberate (albeit far less sophisticated) scheme to circumvent the law.
Like her misconduct in Ontario, she was responsible for the creation and use of false documents
to facilitate the scheme. Unlicensed or unapproved personnel, again like the current case, sold
the investment product in issue.

17.
The disciplinary record also shows that serious regulatory violations took place under
Howard Stuart’s watch as President and Chief Executive Officer. Equally important,
notwithstanding the ASC’s finding as to Ms. Stuart’s level of culpability, he continued to allow
her to function in a similar capacity in Ontario. The ASC’s order prohibiting Ms. Stuart from
continuing to serve as a director or officer of an issuer/registrant and prohibiting W.H. Stuart
from employing her in any capacity without the ASC’s approval may only have extended to
these Respondents’ dealings in Alberta (we do not profess to be interpreting the ASC’s order or
its jurisdiction), but her continued role as a directing mind of W.H. Stuart in Ontario, most
particularly as the person most responsible for compliance, signals, at best, an indifference to the
findings of the ASC and to regulation more generally.

18.
We also find Ms. Stuart’s status in Ontario, including her registration as an Approved
Person, an officer and director and the Ultimate Designated Person is troubling for another
reason. Although there is no evidence before us as to how and why Ms. Stuart received
regulatory approval to serve in her various roles in Ontario, one would have thought that the
ASC findings vis-à-vis Dianne Stuart would have presented a significant roadblock to her ability
to carry on in Ontario, and thus, be well situated to commit the serious misconduct described in
our earlier Reasons. In fairness, Enforcement Counsel was not in a position to comment on what
had transpired years earlier in this regard, though he expressed his understanding that reciprocity
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and cooperation between regulators across Canada has improved significantly over the years. We
certainly hope so.

Dianne Stuart

19.
Ms. 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. The scheme involved, among other things,
misrepresentations, forged or “doctored” transactional and financial records, misappropriations
and failures to account. More than 180 clients were drawn into the Note Program alone. It is not
surprising, given the efforts to disguise or conceal the nature of the Note Program, or its very
existence, that the misconduct remained undetected by regulators for an extended period of time.

20.
Ms. Stuart’s disciplinary record reinforces her level of culpability and the need for the
severest penalty to protect the public, generally deter like-minded individuals and restore
confidence in the profession and the markets as a whole. On our findings, it was inevitable that
we order that she be permanently prohibited from conducting securities related business in any
capacity as an Approved Person of, or in association with, any Member of the MFDA.

21.
A fine is appropriate as well. It should reflect, among other things, the seriousness of her
misconduct and the losses incurred as a result of that conduct. It should send a strong message to
the public and to those who might be inclined to follow in Ms. Stuart’s footsteps. We do not
know the precise losses incurred – indeed, it is reasonable to infer that they are understated in the
evidence before us. In considering losses, we are mindful that they have been incurred by
individuals who, for a variety of reasons, may not be eligible for full or any compensation. As
well, monies paid out in compensation by the MFDA Investor Protection Corporation also
constitute losses resulting from her misconduct. Those payouts have been borne by the industry
as a whole.

22.
The MFDA Investor Protection Corporation paid out over $6 million in compensation
relating to the Note Program, and $826,638.99 relating to misappropriations or failures to
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account unconnected to the Note Program. Based on the totality of the circumstances, we order
that Ms. Stuart pay a fine of $7 million dollars. For reasons reflected below, we also order Mr.
Stuart to pay a fine in the amount of $1 million. They are jointly and severally liable up to the
amount of $1 million. Thereafter, the liability rests with Ms. Stuart alone. We also order that, to
the extent to which Enforcement Counsel is satisfied that either or both Respondents have made
restitution (voluntary or compelled) in any related legal proceeding to those who have incurred
losses, including the MFDA Investor Protection Corporation, these fines shall be reduced
accordingly, and equally as between the two Respondents. The Chair of this Hearing Panel is
delegated the authority to address any dispute in this regard, should it arise.

23.
In light of the financial difficulties that prompted the misconduct, and the absence of any
enforcement mechanism available to the MFDA, there may be very limited expectation that fines
of this magnitude will be paid by the individual Respondents. However, unlike W. H. Stuart’s
situation, there is no real evidence before us as to the assets and liabilities of the individual
Respondents or any future prospect or lack thereof of payment. In our view, the principles that
inform penalty support the imposition of these large fines here.

Howard Stuart

24.
We found that Howard Stuart failed to cooperate with the MFDA. The MFDA made no
other formal allegation against him. Nor did it ask that we make findings against him in relation
to the activities set out in Allegations #1-5. As well, we are mindful of the implications for
procedural fairness that flow from the fact that the allegation against Mr. Stuart, which he
received notice of, was confined in this way.

25.
On the other hand, we are obligated to consider the seriousness of his failure to cooperate
in the context of the totality of the evidence. He was the President and Chief Executive Officer of
W.H. Stuart at the material time and indeed, was its founder. He was instrumental in setting up a
number of the related entities, including those used to facilitate the misconduct. He continued to
receive payments from the company for an extended period of time. Whatever Mr. Stuart’s
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precise state of mind when these payments were being made, it is reasonable to infer, as we do,
that these payments constituted ill-begotten gains.

26.
Howard Stuart was undeniably aware of the financial hardships being experienced by W.
H. Stuart and the need to generate funds to fuel the litigation involving the company. He has a
prior disciplinary record in Alberta and was aware of the findings and order made by the ASC
vis-à-vis Dianne Stuart. Nonetheless, he was prepared to allow Ms. Stuart to play a crucial role
in the company, while he remained its President and Chief Executive Officer.

27.
Although Mr. Stuart did not face the substantive allegations proven against Ms. 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. Such a complete understanding could have come from his answers to questions – whether
entirely truthful or not.

28.
All of this to say, we must engage in a balancing exercise: both recognizing the actual
allegation proven against Mr. Stuart and the need to ensure that there is little or no incentive for
refusing to cooperate with an ongoing investigation.

29.
In summary, in light of the context described above, we regard Mr. Stuart’s failure to
cooperate to be very serious. We see little or no extenuating or mitigating circumstances. There
are a number of aggravating circumstances, including his prior disciplinary record in Alberta,
W.H. Stuart’s disciplinary record while he was President and Chief Executive Officer, and his
preparedness to allow Ms. Stuart to play the role that she did in W.H. Stuart’s Ontario activities.
In our view, it is appropriate that Mr. Stuart be permanently prohibited from conducting
securities related business in any capacity as an Approved Person of, or in association with, any
Member of the MFDA. This may not be required in every failure to cooperate case, but we also
observe that existing jurisprudence supports this disposition in a number of failure to cooperate
cases.

Page 9 of 11

30.
We have already indicated that the appropriate fine for Mr. Stuart is $1 million. This
recognizes that he is differently situated than Ms. Stuart, but that a number of aggravating factors
make his failure to cooperate particularly serious. The permanent prohibition and large fine are
intended to provide a disincentive to anyone who is inclined to fail to cooperate with one’s
regulator.

31.
We were invited by Enforcement Counsel to consider whether the Stuarts’ status as
husband and wife should be a relevant consideration. Enforcement Counsel submitted that this
made Mr. Stuart a beneficiary, in a joint household, of the monies unlawfully extracted from
investors.

32.
We prefer not to place any reliance on their status as husband and wife for several
reasons. First, there was some evidence that they separated in 2007 and sometime later, divorced.
Arguably, they were not in a common household for a significant part of the material time frame.
Second, in our view, we must be careful not to attribute, in the absence of evidence, the
wrongdoing of one spouse too readily to the other spouse – especially where the MFDA has not
proceeded against Mr. Stuart on Allegations #1-5. What must also be self-evident from this
analysis is that we have placed no reliance on Ms. Stuart’s description of her ex-husband’s role
in the firm’s activities. Her credibility is highly suspect, and has been found wanting on a
number of points.

W.H. Stuart

33.
W.H. Stuart has not been active and its membership in the MFDA has been suspended for
some time. Given its corporate liability, its connection to the individual Respondents, and its
current status, it is appropriate to terminate its membership in the MFDA.

34.
We explained earlier in these Reasons why we see no rationale for imposing a fine or a
costs award on W.H. Stuart. As we also explained earlier, had W.H. Stuart been differently
situated, we would have had no hesitation in imposing a multi-million fine on it as well.
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Enforcement Counsel did not object to our approach in the very particular circumstances of this
case.

Order

35.
Our formal order will capture the terms contained in paragraph 6 of our Reasons, together
with the fines contained in paragraph 22 of our Reasons. In our view, a fine and costs order
should normally be accompanied by a specified time for payment. Otherwise, there is
uncertainty as to when the fine and costs are past due. Ms. Stuart and Mr. Stuart are to pay the
fines and costs within 24 months of the release of these Reasons.

36.
We are grateful to Enforcement Counsel and the affiants whose evidence was placed
before us for their careful and fair presentation of the facts.

DATED this 16th day of May, 2016.

“Mark J. Sandler”
Mark J. Sandler

Chair

“Kenneth P. Mann”
Kenneth P. Mann

Industry Representative

“Vasant Pachapurkar”
Vasant Pachapurkar

Industry Representative

DM 481644 v1
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