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Decision and Reasons

Re:

Decision and Reasons


Decision and Reasons
File No. 201222



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: Edgar Mahilum


Heard: October 9, 2012 in Toronto, Ontario
Reasons for Decision: October 17, 2012

DECISION AND REASONS

Hearing Panel of the Central Regional Council:

The Hon. John B. Webber, Q.C.
Chair

Terrence Bourne
Industry Representative

Dena Norton
Industry Representative

Appearances:

Rohit
Kumar
) Enforcement Counsel, Mutual Fund Dealers

) Association of Canada (“MFDA”)

Edgar Mahilum
)
Respondent did not appear and was not
)
represented by Counsel

)

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1.
By Notice of Hearing dated the 22nd day of June 2012, a Hearing Panel of the Central
Regional Council of the MFDA was convened to hear the merits of this matter. The Panel
convened at 10:00 a.m. The Respondent did not appear. The Panel, out of an abundance of
caution, delayed the commencement of the proceedings until 10:15 a.m. The hearing then
proceeded in the absence of the Respondent. We were satisfied that the Respondent was well
aware of the date for the hearing. He took part in the original telephone conference call on
August 9, 2012. At that time the date for hearing was set on consent for October 9, 2012. In
addition, on the date set for the hearing Enforcement Counsel received from the Respondent an
email dated October 9, 2012 (Exhibit 5), which reads as follows:

Due to the fear for my safety at the public hearing this morning I will not be
attending, secondly in reference to the allegations and the written submissions
being presented I will accept the courts (sic) decisions and the penalties and fines
imposed upon me.

2.
In view of this email and the Respondent’s involvement in the first appearance by
telephone conference we are satisfied that the Respondent has received sufficient notice of the
hearing. Therefore it was appropriate to proceed with the hearing pursuant to Rule 7.3 of the
Rules of Procedure.

3.
We then proceeded to hear the evidence from John Gallimore. He is the author of the
affidavit (Exhibit 4) sworn October 1, 2012. There are numerous exhibits which outline the
entire history of this case attached to the affidavit. Some of this evidence can be defined as
hearsay, but pursuant to Rule 1.6(1) of the Rules of Procedure we are authorized to receive and
accept this evidence.

4.
The allegations against the Respondent are as follows:

Allegation #1: Between January 1, 2004 and December 31, 2008, the Respondent
engaged in securities related business that was not carried on for the account and
through the facilities of the Member by recommending, selling or facilitating the
sale of investments in the total amount of approximately $375,000 to client PS
and individuals BR and GB outside the Member, contrary to MFDA Rules
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1.1.1(a) and 2.1.1.

Allegation #2: On or about September 5, 2008, the Respondent provided false
and misleading information to the Member in response to the Member’s inquiry
regarding a client redemption, thereby failing to observe high standards of ethics
and conduct in the transaction of business and be of such character and business
repute as is consistent with the standards prescribed by MFDA Rule 2.1.1.

Allegation #3: Commencing on or about October 19, 2011, the Respondent has
failed to provide documents and information as requested by MFDA Staff during
the course of an investigation, contrary to section 22 of MFDA By-law No. 1.

5.
In response to the allegations, the Respondent filed a reply (Exhibit 3) dated August 8,
2012. In that reply the Respondent stated as follows:

1) Based on my stated and recorded deposition and testimony with both the
MFDA Investigation officer at the MFDA office and the detectives at 22-Division
based in Brampton Allegations #1 and #2 are all true and fourthright (sic) BUT
again because of the Blackmail and Physical Threat towards me and my family I
carried through on my actions in order to protect myself and my family.

6.
In that reply, the Respondent also indicates that he has made efforts to obtain material
requested to answer Allegation #3, but has not been entirely successful. The evidence with
reference to Allegation #3 indicates the Respondent did not make any real efforts to respond to
the request of the MFDA. This conclusion is also confirmed in the facts and email from
Scotiabank (Exhibits 6 and 7).

7.
Upon consideration of the allegations, the affidavit of John Gallimore, the evidence of
John Gallimore, the emails of August 8 and October 9, 2012, the submissions counsel for the
MFDA, the provisions of the by-laws of the MFDA and the applicable legal principles we have
concluded that the MFDA has proven on a balance of probabilities the allegations recited above.

8.
We accept, apply and agree with the principle found in Breckenridge (Re), 2007
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LNCMFDA 38, (“Breckenridge”), which stated the following with respect to the nature and
significance of the prohibition found in Allegation #1:

We agree with the submission of Enforcement Counsel that MFDA Rule 1.1.1(a)
is fundamental to the regulatory mandate of the MFDA to enhance investor
protection and strengthen public confidence in the Canadian mutual fund industry.
This Rule creates a regime where an Approved Person is only permitted to sell
investment products that have been first approved for sale by the Member with
which the Approved Person is registered and which are sold through the facilities
of that Member.

Rule 1.1.1(a) is designed to protect both the Member and its clients. When a
transaction is done off the books, the Member loses its ability to supervise the
transaction and to take responsibility for the suitability of the transaction for the
investor.

Breckenridge (Re), 2007 LNCMFDA 38, Hearing Panel of the Central Regional Council,
Decision and Reasons dated November 14, 2007, at paras. 63-64.

9.
We also accept, apply and agree with the principles and the authorities cited at paragraph
14 of Staff’s submissions. We also find that the Respondent has breached the standard of conduct
as found in MFDA Rule 2.1.1. See Breckenridge, (Re)(supra), at paragraphs 69 and 71. The
Respondent admits his actions as set forth in paragraphs 21 and 27 to 30, inclusive, of Staff’s
submission.

FACTS

10.
Between October 30, 2006 and October 7, 2010, the Respondent was registered in
Ontario as a mutual fund salesperson with Investors Group Financial Services Inc. On October 7,
2010 the Respondent was terminated by Investors Group. The Respondent had been previously
registered in Ontario on the following dates:

(a) between January 2006 and October 2006 as a mutual fund representative with BMO
Nesbitt Burns Inc.;
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(b) between October 2003 and November 2005 as a mutual fund salesperson with BMO
Investments Inc. (“BMOII”), a Member of the MFDA; and
(c) between December 1995 and June 2003 as a mutual fund salesperson with another
mutual fund dealer.

The respondent is not currently registered in the securities industry in any capacity.

11.
In June 2010, during the course of an investigation conducted by the Ontario Securities
Commission (“OSC”) concerning an alleged distribution of securities carried out by a company
known as Hillcorp International Services, the Respondent was identified as a participant in the
distribution of securities. The OSC referred his involvement to the MFDA. The MFDA did an
investigation during which it was determined that the Respondent was aware of the nature and
terms of the investments in Hillcorp. The Respondent had provided brochures to client PS and
BR and GB which indicated that the funds solicited were to be used to invest in the purchases of
shares of oil and real estate companies.

12.
As alleged in the notice of hearing three individuals were involved. The individual known
as BR invested $100,000 in Hillcorp. The individual known as GB also invested $100,000 in
Hillcorp and the client PS invested $185,000 in Hillcorp.

13.
In July 2009 the OSC issued a temporary cease trade order against Hillcorp and its
principals and another corporate respondent named Suncorp Holdings, which was an entity
related to Hillcorp.

14.
The two principals of Hillcorp entered pleas of guilty in the Ontario Court of Justice to
one count each of breaching the cease trade order. As part of the sentence imposed on April 18,
2011, they were ordered to pay restitution totaling $993,089.67. The parties mentioned earlier,
GB, BR and client PS, were not parties to the restitution order.

15.
Hillcorp was not an investment approved by Investors Group or BMOII for sale by its
approved persons, including the Respondent. The transactions involving BR, GB and the client
PS were not processed for the account or through the facilities of either Investors Group or
BMOII. By facilitating the sale of investments of Hillcorp to clients BR, GB and client PS the
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Respondent engaged in securities related business which was not carried on for the account and
through the facilities of the Member between January 1, 2004 and December 31, 2008. These
activities are all contrary to the MFDA Rules 1.1.1(a) and 2.1.1.

16.
Investors Group made inquiries as to the deferred sales charges which appeared upon the
redemption of certain securities controlled by the Respondent. The Respondent advised Investors
Group that the funds were needed for other purposes rather than the investment in Hillcorp. This
information given to the Member was false and misleading. The Respondent therefore breached
the high standards of ethics and conduct in the transaction of the business contrary to the
standards prescribed by MFDA Rule 2.1.1.

17.
The Respondent was interviewed by MFDA Staff. He claimed he did not receive any fees
or commissions for his role in the facilitating of sales of investments in Hillcorp. In an effort to
determine the truthfulness of this response the Respondent was asked to provide copies of his
bank statements. He undertook to do so. Notwithstanding efforts made by Staff they were unable
to get that material, as is clear from paragraphs 57 and 58 of Mr. Gallimore’s affidavit.
Mr. Gallimore confirmed that of the four items requested only two were obtained from the
Respondent. Those steps illustrate a clear breach of his obligation, contrary to s. 22.2 of the
MFDA By-law No. 1.

PENALTY

18.
As a Panel, we are obviously concerned with this type of conduct. In determining what
the appropriate penalty should be we have considered a number of factors. These include the
following:

(a) the public interest and whether the penalty imposed will protect investors;
(b) whether the penalty is reasonable and proportionate, having regard to the conduct of
the Respondent as set out above;
(c) whether the penalty addresses the issues of both specific and general deterrence;
(d) whether the penalty will prevent the type of conduct which is set out above;
(e) whether the penalty will foster confidence in the integrity of the Canadian capital
markets;
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(f)
whether the penalty will foster confidence in the integrity of the MFDA; and
(g) whether the penalty will foster confidence in the regulatory process itself.

SUBMISSIONS AS TO PENALTY

19.
Counsel for the MFDA submits that the following penalties should be imposed:

(a) a permanent prohibition on the authority of the Respondent to conduct securities
related business in any capacity while in the employ of, or in association with, any
Member of the MFDA, pursuant to s. 24.1.1(e) of MFDA By-law No. 1;
(b) a global fine in the range of $75,000 to $125,000, pursuant to s. 24.1.1(b) of MFDA
By-law No. 1; and
(c) costs against the Respondent in the range of $5,000 to $7,500, pursuant to s. 24.2 of
MFDA By-law No. 1.

20.
Counsel for the MFDA in careful and thoughtful submissions suggested a number of
factors for the Panel to consider in addition to those factors found in paragraph 52 of Staff’s
submission. Those matters are as follows:

(a) the Respondent’s misconduct is serious: conducting off-book securities related
business violated a prohibition designed to protect investors by ensuring proper
oversight of trading activity;
(b) the Respondent provided false and misleading information to the Member which
concealed his off book activities;
(c) his failure to produce documents as required by Staff frustrated Staff’s proper
investigation of his conduct; and
(d) the Respondent knew that the $385,000 Hillcorp Investment was not a genuine
investment and has admitted the same to the investigator.

21.
The Respondent recognized the seriousness of his misconduct. He has attempted to
minimize this conduct by alleging that he was threatened to conduct this business because of
threats to him and his family. There was no evidence of these threats called by the Respondent.
This evidence was of little value. We find that this submission by the Respondent not only in his
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interview and in the emails filed was simply an effort to avoid a more serious penalty. In addition
he has failed to produce all the documents required by Staff in a timely manner.

22.
There is no client complaint as to any losses. It appears that the income promised to
investors was never paid and in addition BR, GB and client PS did not recover anything, as the
restitution order by the OSC made in favour of many of the investors in Hillcorp and Suncorp
did not include them.

23.
We have considered the MFDA penalty guidelines which are not mandatory or binding
but are simply a matter of guidance for the Panel. In addition, we have considered the penalties
that have been posed in similar circumstances as found in the cases cited by Staff and found at
paragraph 68 of Staff’s submissions.

24.
For all of these reasons, and considering the appropriate principles which we have
discussed and reviewed, and notwithstanding the conduct of the Respondent, we have concluded
that the appropriate penalty and costs will be as follows:

(a) a permanent prohibition on the authority of the Respondent to conduct securities
related business in any capacity while in the employ of, or in association with, any
Member of the MFDA, pursuant to s. 24.1.1(e) of MFDA By-law No. 1;
(b) a global fine in the amount of $125,000, pursuant to s. 24.1.1(b) of MFDA By-law
No. 1; and
(c) costs in the amount of $7,500, pursuant to s. 24.2 of MFDA By-law No. 1.

25.
We advised Enforcement Counsel upon the completion of the evidence and submissions
that we would prepare reasons as to our findings in this matter. These are our reasons for making
the findings that we did and for the penalties imposed upon the Respondent.

DATED this 17th day of October, 2012.

“John B. Webber”
The Hon. John B. Webber, Q.C.,

Chair
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“Terrence Bourne”
Terrence Bourne,

Industry Representative

“Dena Norton”
Dena Norton,

Industry Representative

Doc 315210
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