IN THE MATTER OF A SETTLEMENT HEARING
PURSUANT TO SECTIONS 24.4 OF BY-LAW NO. 1
OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA
RE: ALTIMUM MUTUALS INC.
Hearing: June 15, 2007
Decision: June 15, 2007
DECISION AND REASONS
Hearing Panel of the Ontario Regional Council:
The Hon. Fred Kaufman, C.M., Q.C.
Shel y Feld
For the Mutual Fund Dealers Association
For the Respondent
By Notice of Settlement Hearing, the Mutual Fund Dealers Association of Canada
(“MFDA” or “the Association”), announced that it proposed to hold a hearing to consider
whether, pursuant to section 24.4 of MFDA By-law No. 1, a Hearing Panel of the
Ontario Regional Council should accept the Agreement entered into by MFDA staff and
Altimum Mutuals Inc. (“the Respondent”). This hearing was held in Toronto, Ontario,
on June 15, 2007, at the conclusion of which the Panel accepted the Agreement. What
fol ows are the Panel’s reasons.
The facts, as agreed by the parties, are as fol ows:
The Respondent is registered as a mutual fund dealer and limited market
dealer in Ontario. The Respondent’s head office is located in St.
Catharines, Ontario. Between July 18, 2003 and February 14, 2005 (the
“Material Time”), the number of mutual fund salespersons that were
registered with the Respondent ranged between 2 and 7. The
Respondent has been a Member of the MFDA since May 29, 2003.
The Respondent has no previous disciplinary history.
This Settlement Agreement concerns misleading sales communications
prepared and used by the Respondent to promote a referral arrangement
between the Respondent and Portus Alternative Asset Management Inc.,
formerly Paradigm Alternative Asset Management Inc. (“Portus).
On March 14, 2003, Portus was registered as an Investment Counsel and
Portfolio Manager (“IC/PM”) in al Canadian jurisdictions except Quebec.
Portus developed investment products distributed directly and indirectly to
Page 2 of 12
On or about July 18, 2003, the Respondent entered into a referral
arrangement with Portus (the “Agreement”). The Agreement provided
that Portus would pay the Respondent referral fees based on the amount
of assets invested by the Respondent’s clients in Portus securities.
Between December 2003 and January 22, 2005, the Respondent
received approximately $117,000 in referral fees from Portus under the
terms of the Agreement.
Portus purported to rely on exemptions from the prospectus requirements
available in the jurisdictions in which its securities were offered for sale to
retail investors. Portus presented its securities to the Respondent and
others as principal protected note products, structured such that: (i) a
large proportion of the funds invested would be used to purchase a
guaranteed instrument from a Canadian chartered bank at a discount
which would mature at a value equivalent to the principal invested by
clients; (i ) a second portion of the monies invested would be used to pay
fees and expenses of the manager, including commissions for sales and
referrals; and (i i) the remaining funds would be invested aggressively and
actively managed in investments acquired for the purpose of
supplementing the return for investors. Marketing materials prepared by
Portus to promote its securities stated that Portus was targeting monthly
returns of 0.5%-1% and annual returns of 8%-12% but noted that “[t]here
is no guarantee of performance and past or projected performance is not
necessarily indicative of future results”.
Page 3 of 12
Staff of the Ontario Securities Commission (“OSC”) subsequently came to
the view that: (i) Portus securities did not qualify for the prospectus
exemptions that Portus relied upon; (i ) Portus securities were not
structured in a manner that would provide principal protection directly to
the investors who acquired Portus securities; and (i i) the funds invested
in Portus securities were not administered or invested appropriately.
As a result, in February 2005, the OSC 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 (the
“OSA”). Subsequently, bankruptcy proceedings were commenced
against Portus and the OSC commenced enforcement proceedings
against Portus, its affiliates and certain officers and directors of Portus.
OSC Terms & Conditions On Dealers That Referred Clients To Portus
14. Securities dealers that referred clients to Portus in Ontario, including the
Respondent, (the “Ontario Dealers”) voluntarily agreed to terms and
conditions on their registration stipulating that the Ontario Dealers would
repay clients al referral fees received from Portus (the “OSC Terms &
Conditions”). As part of the OSC Terms & Conditions, the OSC, the IDA
and the MFDA agreed not to pursue enforcement proceedings against the
Ontario Dealers for the failure of such dealers to: (i) exercise appropriate
due diligence before entering into referral arrangements with Portus; or (i )
adequately supervise Approved Persons and Registered Representatives
with respect to the appropriateness of specific referrals of their clients to
Page 4 of 12
Misleading Sales Communications
In March 2004, the Respondent produced two pamphlets for the purpose
of soliciting investments by clients in Portus securities and similar exempt
securities available from other issuers that offered some kind of principal
guarantee at maturity. The features attributed to the investments
described in the pamphlets were based primarily upon the Respondent’s
understanding of Portus securities.
One of the pamphlets (the “RSIP Pamphlet”) purported to promote an
investment product referred to as the Retirement Security Investment
Plan (“R.S.I.P.”). The Respondent had obtained a registered trademark
for the term R.S.I.P. prior to publishing the pamphlet. The other
pamphlet (the “Portfolio Navigator Pamphlet”) described and promoted
the merits of what appeared to be a unique investment tool, software or
methodology cal ed the Portfolio Navigator. Neither the RSIP investment
product nor the Portfolio Navigator investment process existed. Both
concepts were creations of the Respondent designed to induce clients to
invest in what were, in fact, Portus securities. The Respondent did not
acknowledge in the pamphlets that Portus was the issuer of the
underlying investments promoted in the pamphlets.
The Respondent prepared both pamphlets without participation by or
authorization from Portus or any other third party. Some of the content in
the pamphlets was borrowed from or influenced by marketing materials
Page 5 of 12
The Respondent claims that it was under the misapprehension that MFDA
Rules were not applicable to sales communications produced for the
purpose of soliciting investor interest in non-mutual fund products.
Although the two different pamphlets were designed to solicit interest in
the same Portus securities:
The RSIP Pamphlet was designed to appeal to clients over the age
of 55 with conservative investment objectives who were
approaching retirement and were concerned primarily with the
safety of their principal; and
The Portfolio Navigator Pamphlet was designed to appeal to clients
under the age of 55 who had more aggressive investment
objectives and were attracted to sophisticated investment
The RSIP Pamphlet
The RSIP Pamphlet constituted a misleading sales communication issued
to the public because:
The pamphlet contained untrue or misleading statements, contrary
to MFDA Rule 2.7.2(a), as it stated or implied that an RSIP:
“is the perfect Retirement Security Investment Plan”;
“was created for those 55 years of age and older who want
to stop taking so much risk with their retirement funds”;
“was designed to replace G.I.C.’s in a portfolio”;
Page 6 of 12
features benefits such as positive and consistent returns
and broad diversification; and
operates such that an investor’s “$10,000 portfolio wil 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 wil hold exactly the same investments
in exactly the same proportions and both investors wil pay
exactly the same fees.”
is recognized by the Canadian government as an alternative
to a Registered Retirement Savings Plan (“R.R.S.P.”) by:
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
making use of a similar acronym, accompanied in
places by a red maple leaf;
stating that the RSIP was designed for individuals
investing for their retirement years and seeking a tax
advantaged return; and
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.
(vi ) 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
Page 7 of 12
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.
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).
The Portfolio Navigator Pamphlet
The Portfolio Navigator Pamphlet constituted a misleading sales
communication that was issued to the public contrary to MFDA Rule 2.7.2
The pamphlet contained untrue or misleading statements, contrary to
Rule 2.7.2(a), as it stated or implied that:
“[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;
Page 8 of 12
“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;
We use something cal ed Portfolio Navigator to tel us when to buy
and sel . 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 sel ing 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;
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:
“With Portfolio Navigator as a guide, we invest for you”;
includes frequent references to “Our elite managers” who
make use of “technical analysis”, “short sel ing, leverage,
market timing and hedging” and “active, discretionary
money management techniques, aiming to improve the
performance of your portfolio while systematical y reducing
We don’t bother you with the day-to-day decisions. Our elite
managers take whatever initiative is necessary and make al
of the trading decisions for you;”
Page 9 of 12
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 mil ion 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
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.
The parties agree, and so does the Panel, that, by its actions, the Respondent acted
contrary to the public interest and thereby contravened MFDA Rules 2.7.2 and 2.1.1(c)
by distributing misleading sales communications to clients.
The agreed-upon penalty is a fine of $10,000, to be imposed pursuant to MFDA By-law
No. 1, section 24.1.1(b).
Page 10 of 12
As has been said before (see, for instance, Re: Investors Group Financial Services
Inc., MFDA Case # 200401, December 16, 2004), and Re: Joseph Zol o, MFDA Case #
200610, April 16, 2007), in determining whether the Settlement Agreement should be
accepted, the Hearing Panel wil consider a number of factors, including the fol owing:
The public interest and whether the penalty imposed wil protect investors.
Whether the Settlement Agreement is reasonable and proportionate,
having regard to the conduct of the Respondent, as set out in the
Whether the Settlement Agreement addresses the issues of both specific
and general deterrence.
Whether the proposed settlement wil prevent the type of conduct
described in the Agreement from occurring again in the future.
Whether the Settlement Agreement wil foster confidence in the integrity
of the Canadian capital markets.
Whether the Settlement Agreement wil foster confidence in the integrity
of the MFDA.
Final y, whether the Settlement Agreement wil foster confidence in the
regulatory process itself.
Upon consideration, we find that al these factors have been dealt with in an
appropriate fashion. The Respondent’s business is operated from an office in its
owner’s home. It is not a large operation and the two pamphlets in question did not
have a wide distribution (they were sent to approximately 150 clients and also
displayed in the Respondent’s office and on the company’s website). About 70 clients
invested a total of $2,750,000 in Portus securities, resulting in referral fees paid by
Portus to the Respondent of $117,000. This amount has been disgorged by the
Respondent, in accordance with the terms and conditions of the Ontario Securities
Commission on the registration of Ontario dealers who referred clients to Portus.
Page 11 of 12
The Respondent has no disciplinary record. Mr. Reid (who was present at the hearing)
co-operated ful y with MFDA investigators, avoiding thereby the necessity of a lengthy
inquiry. His admissions reflect acceptance of responsibility for his conduct, and the
fine, together with the disgorgement of profits, adequately underline the gravity of the
matter and constitute sufficient deterrence for the future.
It is for these reasons that the Hearing Panel accepted the Settlement Agreement.
Given at Toronto, Ontario, this 22nd day of June, 2007.
Hon. Fred Kaufman, C.M., Q.C., Chair
Robert Hovianseian, Industry Representative
Jeanne Beverly, Industry Representative
Page 12 of 12