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Decision and Reasons

Re:

Decision and Reasons

Decision and Reasons
File No. 200804


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: Gerard H. Brake and Mavis E. Brake


Heard: October 27 and 28, 2008, Winnipeg, Manitoba
Panel Decision: December 3, 2008


DECISION AND REASONS
(Misconduct)

Hearing Panel of the Prairie Regional Council:

Robert Hucal

Chair

M.E. (Elaine) Bradley
Industry Representative

Erwin Granson

Industry Representative

Appearances:

Maria Abate
)
For the Mutual Fund Dealers Association

Charles Toth
)
of Canada

Mavis Brake
)
Attended Personally

Gerard Brake
)
Not in attendance personally or represented
)
by counsel – represented by Mavis Brake by
)
letter of Authority

THE ALLEGATIONS

1.
By Notice of Hearing dated the 12th day of March, 2008, the following allegations
were made against Gerard H. Brake and Mavis E. Brake (“Respondents”):

Allegation #1: Between November 2003 and August 2006, the Respondents had
or continued in occupations that were not disclosed to or approved by the
Member, contrary to MFDA Rule 1.2.1(d).

Allegation #2: Between November 2003 and August 2006, the Respondents
engaged in securities related business outside the Member by selling more than $1
million in shares of corporations that they owned and operated, to 24 clients,
which sales were not carried on for the account of the Member or through the
facilities of the Member, contrary to MFDA Rule 1.1.1(a).

Allegation #3: Between November 2003 and August 2006, the Respondents sold
more than $1 million in shares of corporations that the Respondents owned and
operated to 24 clients, thereby giving rise to a conflict of interest which the
Respondents failed to disclose to the clients and to the Member and which the
Respondents failed to address, 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.

Allegation #4: Between November 2003 and August 2006, the Respondents
solicited and accepted more than $1 million from 24 clients to be invested on their
behalf in corporations that the Respondents owned and operated and have failed
to return or otherwise account for the monies, contrary to MFDA Rule 2.1.1.

Allegation #5: Between November 2003 and August 2006, the Respondent Mavis
E. Brake failed to fulfill her obligations as a Branch Manager by intentionally
concealing from the Member conduct and outside business activities that the
Respondents were engaging in that contravened the Member’s policies and
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procedures and MFDA regulatory requirements, contrary to MFDA Rule 2.5.3(b)
and 2.1.1.

Allegation #6: Commencing May 20, 2006, the Respondents have refused to
produce for inspection and provide copies of documents and records requested by
the MFDA during the course of an investigation, contrary to section 22.1(b) of
MFDA By-law No. 1.

2.
The allegations were the result of extensive investigations carried out by
investigators of the MFDA. In general, the documents placed in evidence disclosed that
both Respondents were involved in persuading existing clients and others to invest in
corporations owned or controlled by the Respondents and were established for the
purpose of developing cottage properties as long term investments and for personal and
third-party lease purposes.

SERVICE – NOTICE OF HEARING

3.
The Respondent, Mavis Brake, appeared on her own behalf and provided a letter
from the Respondent, Gerard Brake, authorizing Mavis Brake to act as his agent. No
counsel appeared in either of their interests.

4.
At the First Appearance on April 23, 2008, affidavits were filed indicating that the
Notice of Hearing was sent to the Respondents and receipt acknowledged. On that date
the Respondents asked for a lengthy period to prepare and they were accordingly
provided with hearing dates six months hence, commencing October 27, 2008.

5.
Prior to the commencement of the proceedings, we were told that several emails
and letters went forward to the Respondents requesting their involvement and
participation. No response was filed and no indication was given that the Respondents or
either of them was planning to participate. All materials in the possession of the Panel
were delivered to the Respondents.

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6.
It was clear that every reasonable attempt was made by MFDA staff to ensure that
the Respondents, if they chose, could participate fully in the hearing.

7.
It should be noted that the Respondent, Mavis Brake, who appeared on her own
behalf and on behalf of Gerard Brake, indicated to the panel, not immediately, but by her
eventual representations, that although she was appearing on her own and on Gerard
Brake’s behalf, her only motive was to tell her story by written submission. She waived
her rights to examine any witnesses, after being granted an adjournment on the first day
to prepare to examine David Sharpe, MFDA Director of Investigations, whose evidence
was introduced by affidavit. She concurrently waived her right to examine Wendy
Tschetter, who was offered as a witness. Both David Sharpe and Wendy Tschetter were
in attendance at the hearing. She also gave up her right to call her own witnesses or
introduce evidence. Her request on the second day of the hearing was for a further two-
day adjournment to provide a written submission “to tell her side of the story”. The
Panel, recognizing the difficult task before her, granted an adjournment to November 17,
2008, by which date she was to provide a written submission. MFDA counsel was
requested to provide its submission by that date as well.

PRESENTATION OF EVIDENCE

8.
The primary evidence before the Hearing Panel consisted of a total of 28 pages in
two affidavits of David Sharpe, the MFDA’s Director of Investigations. Forming part of
the affidavits was a series of 82 exhibits.

9.
Under the Rules of Procedure, the Hearing Panel may admit as evidence any
testimony or document considered relevant and in this situation we allowed the affidavit
evidence by way of sworn statement of Mr. Sharpe. Mr. Sharpe was made available as a
witness. The Respondents, as indicated, waived their right to cross-examination.

REGISTRATION

10.
From November 2003 to August 2006, Gerard Brake was registered as a mutual
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fund salesperson with FundEx. Gerard and his wife, Mavis Brake, the other Respondent
in this proceeding, operated a branch office of FundEx which used the trade name Brake
Securities Ltd. (“Brake Securities”). On August 21, 2006, Gerard was terminated by
FundEx and he has not been registered in the securities industry in any capacity since that
time.

11.
Between December 2003 and August 2006, Mavis Brake was registered as the
Branch Manager of the FundEx branch at which she and Gerard Brake were employed.
On August 21, 2006, FundEx terminated Mavis and she has not been registered in the
securities industry in any capacity since that time.

Allegation #1 – Failure to Disclose Outside Interests

12.
The Respondents were registered as indicated, as Salesperson and Branch
Manager respectively.

13.
The Respondents, it was determined during the investigation, participated in four
outside businesses or dual occupations without disclosure or approval by FundEx. The
Affidavit of David Sharpe disclosed involvement by the Respondents in Pride, Pride II,
LNU Leasing and 5199230 Manitoba.

14.
The Uniform Applications for Registration submitted by the Respondents on
November 6, 2003 only declared involvement in three outside businesses (as to Gerard
Brake) and as to one outside activity by Mavis Brake.

15.
The investigation found failure on Mavis Brake’s part in her capacity as Branch
Manager, in response to specific requests, to disclose Gerard Brake’s involvement in
Pride. Evidence was provided in that regard. FundEx, as was best determined, was not
advised or aware of these undisclosed activities. In addition, the Respondent Mavis
Brake, in reply to specific requests by FundEx, failed to disclose participation in Pride.

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16.
On the Registration Renewal Application dated December 5, 2005, Gerard Brake
disclosed involvement in Pride and Pride II for the first time, but Mavis did not. Neither
Respondent disclosed involvement in 5199230 Manitoba and LNU Leasing.

17.
The Investigation confirmed that over the course of their employment with
FundEx, neither Respondent disclosed or obtained approval from FundEx to participate
in outside businesses, contrary to their obligations to FundEx and contrary to MFDA
Rules, requiring prompt disclosure of outside activities. The evidence shows that
although the Respondents were asked by FundEx on at least eight occasions whether they
were involved in outside business activities, the Respondents either chose not to disclose
their involvement at all or did so in a manner which was not forthright.

18.
The Respondents chose not to examine Mr. Sharpe on his affidavits and
specifically waived that right after initially requesting an adjournment (which was
granted) during the first hearing day.

19.
In their written argument, the Respondents claimed FundEx was advised of
everything. There was no evidence to that effect.

Allegation #2 – Engaging in Sale of Securities of Related Businesses Outside the Member

Allegation #3 – Failure to Disclose Conflict of Interest and Failure to Exercise
Responsible Business Judgment

Allegation #4 – Failure to Account for or Return Invested Monies

20.
In August, 2003, the Respondents solicited FundEx clients to invest in Pride and
Pride II. This solicitation was confirmed by the Respondents’ interviews and by printed
marketing material provided in evidence. An interview of witness Wendy Tschetter, an
employee of the Respondents and an investor in the outside businesses, confirmed those
actions by Gerard Brake. The proposed investment process required redemption of
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mutual fund holdings, including RRSPs and utilization of the monies to purchase shares
in corporations owned or controlled by the Respondents.

21.
Wendy Tschetter confirmed her personal investment in the Respondents’ Pride
companies by the redemption process aforesaid. Investors were invited to meetings at the
FundEx branch office operated by the Respondents.

22.
The Brakes’ response to Wendy Tschetter’s sworn evidence was that it was
hostile, full of threats, highhanded, terroristic and false. No evidence was introduced to
reflect this rather unique argument.

23.
Both Respondents acknowledge receiving and reading MFDA Rules prohibiting
Approved Persons from selling securities outside the accounts and facilities of the
Member.

24.
The Shareholder’s Register of Pride, Pride II and 5199230 showed former
FundEx clients holding share interests. When asked, the Respondents failed to disclose
these dealings with FundEx clients.

25.
Although Mavis Brake was not a shareholder, director or officer of the various
corporations, she was directly involved in steering FundEx clients to make the
investments in the Pride companies.

26.
Based on documentation made available, the total amount invested in Pride and
Pride II by FundEx clients was in excess of $1,000,000. The amount does not include
shares purchased by FundEx clients in LNU Leasing or 5199230 Manitoba.

27.
The Respondent, Mavis Brake, in response to a specific request, failed to disclose
that Gerard was paid for management services provided to Pride, when in fact the
financial statements of Pride showed business advisory fees paid to Gerard Brake. Final
confirmation of this involvement was frustrated by lack of cooperation from Mr. Brake
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by his failure to provide answers to his undertakings during interviews and his failure to
respond.

28.
The marketing material for Pride and Pride II describes the project as a long term
investment, but failed to disclose adequately that potential risks were associated with the
investment, including the possible difficulty of disposing of their shares. The
investigation was unable to determine if any form of Offering Memorandum was
prepared for distribution to potential investors. The written material directed to investors
simply encouraged redemption of mutual funds or restructure of investments to invest in
shares of Pride, representing potential returns of 30% to 40%. Gerard Brake
acknowledged that no specific disclosure was provided explaining that Pride was
unrelated to FundEx, nor was there any disclosure of risks or conflicts.

29.
The Respondent, Mavis Brake, indicated that although she intended to prepare a
disclosure document to investors, it was never prepared.

30.
It appears clear that investors in the outside business activities of the Respondents
never received full information regarding the risks associated with these investments, nor
of the full extent of the Respondents’ interests in the businesses.

31.
The Brakes argued that all corporations were private and therefore exempt. We
considered this to be an irrelevancy.

32.
The investigation revealed that as of October 24, 2008, no investors had been
repaid and no accounting had been provided to confirm that the monies were used for the
purposes represented by the Respondents. The undertakings given by the Respondents to
provide information which would enable MFDA investigators to track the current
whereabouts of the invested funds have never been met.

33.
The Brakes claim that all actions were done in accordance with an approved
business plan. There was no evidence in that regard.

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34.
After presentation of affidavit evidence in regard to these allegations, the
Respondents chose not to examine Mr. Sharpe.

Allegation #5 – Failure of Mavis Brake to Fulfill her Obligations as Branch Manager

35.
The obligation of a Branch Manager is to ensure that all business conducted by
Approved Persons at the Branch, including, in this case, Registrant Gerard Brake,
complies with applicable securities legislation and the Rules of the MFDA. In addition,
FundEx policies and procedures were to be complied with, including advising FundEx of
any irregularities or contraventions of any pertinent regulation or compliance policies
and, inter alia, to monitor all redemptions of mutual funds and unusual trades identified
by FundEx. The Respondent Mavis Brake acknowledged that her obligations included
disclosure of outside business activities.

36.
The evidence shows that the Respondent Mavis Brake was aware of and
participated in and had a direct or indirect interest in outside business activities not
disclosed to FundEx, including her knowledge of Gerard Brake’s involvement in Pride,
Pride II, 5199230 Manitoba, LNU Leasing (“Respondents’ Companies”), the solicitation
of FundEx clients to invest in the Respondents’ Companies; the redemption of mutual
funds to obtain monies to invest in the Respondents’ Companies; the borrowing of money
from FundEx clients to cover costs relating to the operation of the Respondents’
Companies; and the lack of advice to FundEx clients relating to potential or actual
conflict of interest which existed as a result of the investments in the Respondents’
Companies.

37.
Employee Wendy Tschetter advised MFDA investigators that the Respondent
Mavis Brake instructed Branch employees to remove and conceal evidence of
Respondent Gerard Brake’s involvement in outside business activities. The MFDA
investigation revealed that the Respondent Mavis Brake misled FundEx regarding
reasons for client redemptions by advising FundEx that “purchase of cottage” and
“private reasons” were the rationale for the redemptions, when she otherwise admitted
she was aware the clients were purchasing shares in the Respondents’ Companies.
Page 9 of 13

38.
Additionally, it was alleged that in her capacity as Branch Manager, Mavis Brake:
(a) permitted the Respondent Gerard Brake to file a Uniform Application for Registration
which did not disclose Gerard Brake’s involvement in the Respondents’ Companies; (b)
withheld information regarding civil legal actions commenced against Gerard Brake and
Brake Securities; and (c) failed by the conduct set out in (a) and (b) to fulfill her
supervisory obligations as Branch Manager.

39.
The Respondents were given the opportunity to examine David Sharpe with
respect to the portion of his affidavit relating to Allegation #5 and to examine Wendy
Tschetter, offered as a witness, but declined and waived the right to further examination.

Allegation #6 – Failure to Produce and Provide Documents and to Cooperate

40.
The evidence discloses that notwithstanding numerous and continuing efforts by
MFDA investigators, the Respondents failed to provide records, documents or copies of
documents to assist the investigation of the complaint made against them.

41.
The efforts of the MFDA investigators to obtain documents were thwarted by the
Respondents’ actions, which included the following:

• Failure to provide answers to undertakings agreed to be provided by May 19,
2006;
• Failure to provide answers to undertakings by Gerard Brake as promised on or
before April 3, 2007 (as to Mavis Brake) and April 9, 2007 (as to Gerard
Brake);
• Failure to respond to March 22, 2007 letters and emails to Gerard Brake of
April 3, 2007 and April 9, 2007;
• Failure to provide answers to undertakings as promised in writing by Gerard
Brake on April 16, 2008;
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• Failure to provide documents or information as promised in writing by Mavis
Brake on April 19, 2007;
• Failure to respond to MFDA registered/regular mail correspondence to both
Respondents advising of intended litigation;
• Failure to respond to MFDA letter to lawyer alleging to act on behalf of both
Respondents on June 5, 2007; and
• Failure to provide answers to undertakings arising from interviews conducted
by MFDA investigators on May 4, 2006, March 20, 2007 and March 21, 2007.

42.
The Panel was advised that the Respondents had not provided MFDA
investigators with documentation as requested as of October 27, 2008, the date the
hearing commenced.

43.
The Affidavit evidence was unchallenged by the Respondents and no request was
made to examine Mr. Sharpe.

44.
The Panel has considered the written arguments of the parties and it has been
unanimously determined that the misconduct has been proven with respect to all of the
allegations set out in the Notice of Hearing.

45.
The undisputed evidence, in broad terms, was rather unfavourable, but as no
representation was made by the Respondent, Gerard Brake, we cannot respond to the
issue of remorse, determine whether or not the Respondent ever understood the severity
of his actions or are we able to consider any explanation. Some active involvement on
Gerard Brake’s part, although he was not obliged, would have been of importance to us
in determining our decision. The breaches alleged are serious and appeared to be
planned, deliberate and long lasting. The Respondent Gerard Brake did not cooperate
with the MFDA investigation or admit misconduct of any nature. The number of victims
was large and the Respondent Gerard Brake may have received substantial personal
benefits as no monies were returned and none were accounted for, except on a minimal
basis.
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46.
The Panel has considered the evidence presented as well as the written arguments
of the parties and it has been unanimously determined that the alleged misconduct as set
out in the Notice of Hearing has been proven with respect to all allegations set out
therein, in regard to both Mavis Brake and Gerard Brake.

47.
In considering our disposition of this matter, we felt it was important to deliver as
balanced and even-handed a decision as possible. It should be noted that neither of the
Respondents had a history of misconduct or discipline and that is a positive factor.
However, Gerard Brake failed to appear and Mavis Brake chose not to participate. The
Brakes were allowed, at their request, to have three weeks to prepare written arguments.

48.
Almost immediately, the Brakes filed a Motion seeking to ify the Hearing,
notwithstanding their seeming cooperation and our response to their requests. The
Motion was denied. Within three days, second Motions were filed, seeking the same
remedy. Those Motions, too, were rejected. Notwithstanding those tactics, the Brakes
filed a final Argument, as they had requested to do, on the date required by our Order.

49.
The Argument was, to our minds, unnecessarily vitriolic and abusive. The fact
that the Brakes disagreed with the MFDA position does not warrant the accusatory
position taken by them. The expressed irrelevancies did nothing to support their
arguments.

50.
We are of the opinion that the Brakes deliberately intended to delay the process as
long as possible.

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51.
We expect that a further Hearing will be convened with respect to the argument
relating to penalty and we will issue a supplementary decision in that regard, as
necessary.

Dated this 3rd day of December, 2008.

“Robert Hucal”

Robert Hucal

Chair

“Elaine Bradley”

M.E. (Elaine) Bradley

Industry Representative

“Erwin Granson”

Erwin Granson

Industry Representative

Doc #157214
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