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Notice of Hearing

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:

Amended Notice of Hearing
File No. 201017



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: Stephen Arnold Smith



AMENDED NOTICE OF HEARING

NOTICE is hereby given that a Hearing on the Merits first appearance will take place by
teleconference before a hearing panel (the “Hearing Panel”) of the Central Regional Council of
the Mutual Fund Dealers Association of Canada (the “MFDA”) in the hearing room located at
121 King Street West, Suite 1000, Toronto, Ontario on December 15, 2010 February 8, 2011 at
10:00 a.m. (Eastern), or as soon thereafter as the hearing can be held, concerning a disciplinary
proceeding commenced by the MFDA against Stephen Arnold Smith (the “Respondent”).

DATED this 28th day of September, 2010 8th day of February 2011.

“Jason D. Bennett”

Jason D. Bennett

Corporate Secretary

Mutual Fund Dealers Association of Canada
121 King St. West, Suite 1000
Toronto, Ontario
M5H 3T9
Telephone: 416-943-7431
Facsimile: 416-361-9781
Email: [email protected]

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NOTICE is further given that the MFDA alleges the following violations of the By-laws, Rules
or Policies of the MFDA:

Allegation #1: Between March 8, 2002 and February 20, 2007, the Respondent engaged in
personal financial dealings with former client WS by having and continuing with a profit sharing
agreement and a co-investing arrangement with client WS in respect of the Respondent’s
company, Smith & Tomyak International Inc. (“Smith & Tomyak”) in which former client WS
had invested $26,000, thereby giving rise to an actual or potential conflict of interest between the
Respondent and client WS which the Respondent failed to address by the exercise of responsible
business judgment influenced only by the best interests of former client WS, contrary to MFDA
Rules 2.1.41 and 2.1.1.

Allegation #2: Between September 2004 and February 20, 2007, the Respondent failed to deal
fairly, honestly and in good faith with former client WS by deliberately misleading client WS
about the status of his investment in Smith & Tomyak, contrary to MFDA Rule 2.1.1.

Allegation #3: From September 2004 to February 20, 2007, the Respondent failed to handle
complaints received from former client WS on numerous occasions concerning the status of
client WS’s investment in Smith & Tomyak promptly and fairly by failing to inform the Member
of the complaints and attempting to settle the complaints without the Member’s involvement,
contrary to MFDA Policy No. 3 and MFDA Rules 2.11 and 2.1.1.

Allegation #4: Between September 2004 and February 20, 2007, the Respondent failed to inform
the Member of complaints received from former client WS on numerous occasions concerning
the status of client WS’s investment in Smith & Tomyak and attempted to settle the complaints
without the Member’s involvement, thereby failing to comply with the Member’s policies and
procedures and interfering with the ability of the Member to supervise the Respondent and
comply with its obligations under MFDA Rule 2.11, contrary to MFDA Rules 1.1.2 and 2.5.1,
and MFDA Rule 2.1.1.

Allegation #5: Commencing on or about May 12, 2009, the Respondent has failed to produce for

1 MFDA Rule 2.1.4 was amended on February 27, 2006. It is alleged that the Respondent’s conduct contravened
MFDA Rule 2.1.4 both pre- and post-amendment.

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inspection copies of documents and records requested by the MFDA during the course of an
investigation, contrary to section 22.1 of MFDA By-law No. 1.

PARTICULARS

NOTICE is further given that the following is a summary of the facts alleged and intended to be
relied upon by the MFDA at the hearing:

Registration History

1.
The Respondent was registered in Ontario as a mutual fund salesperson with Quadrus
Investment Services Ltd. (“Quadrus”) from November 19, 2001 to February 20, 2007, when he
resigned from the Member.

2.
Between March 1995 and November 2001, prior to being registered with Quadrus, the
Respondent was registered in Ontario as a mutual fund salesperson with Practitioners Mutual
Planning Inc.2.

3.
Quadrus became a Member of the MFDA on March 8, 2002 and is registered as a mutual
fund dealer in all provinces and territories.

Client WS’ 1998 Investment with the Respondent

4.
On March 12, 1998, WS entered into a “Profit Sharing Agreement” with the
Respondent’s business, Smith & Tomyak International Inc. (“Smith & Tomyak”), a company
incorporated by the Respondent on September 26, 1996. The Respondent was the President of
Smith & Tomyak. Under the terms of the Profit Sharing Agreement, WS invested $20,000 in
Smith & Tomyak in exchange for 25% of the income generated by an “AIDS Tester Project” that
was being launched by Smith & Tomyak in Poland.

5.
On August 21, 1998, WS entered into an “Agreement to Purchase Common Shares” with

2 Practitioners Mutual Planning Inc. was not a Member of the MFDA. The MFDA did not begin accepting Members
until 2002.

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the Respondent, wherein WS, in exchange for a $6,000 payment to the Respondent, purchased
20 common shares of Smith & Tomyak from the Respondent (equivalent to a 2% ownership
interest in the company).

Allegations #1 to #4

6.
On November 19, 2001, the Respondent became registered as a mutual fund salesperson
with Quadrus. That same date, WS became a client of Quadrus. Prior to becoming registered
with Quadrus, The the Respondent was the mutual fund salesperson responsible for servicing
WS’s account at Practitioners Mutual Planning Inc., however WS’s mutual fund investments
were not transferred to Quadrus when the Respondent became registered there.

7.
On March 8, 2002, Quadrus became a Member of the MFDA. The Respondent did not
disclose to Quadrus his profit sharing agreement and co-investing arrangement with former client
WS in Smith & Tomyak at any time, either prior to or following March 8, 2002.

8.
Commencing in the fall of 2004, having not received from the Respondent his promised
share of revenues from the “AIDS Tester Project”, former client WS complained to the
Respondent about the Project’s lack of returns and inquired about a reimbursement of the
$26,000 he had invested in Smith & Tomyak. This complaint and inquiry by former Client client
WS was repeated on numerous occasions to the Respondent until the fall of 2008 (the
“Complaint”).

9.
Between September 2004 and January 2008, and without ever informing Quadrus of the
Complaint, the Respondent promised a number of varying things to former client WS about the
reimbursement of his $26,000 investment. At all times prior to his resignation from Quadrus on
February 20, 2007, and continuing into 2009, the Respondent attempted to placate former client
WS by falsely promising him imminent reimbursement of his $26,000 investment and then
continuously misleading him about its status, as more particularly described below.

10.
At first, the Respondent advised former client WS that he was in possession of the funds
and that former client WS would be reimbursed shortly. When the funds were not reimbursed to
client WS as promised, the Respondent then advised former client WS that the “AIDS Tester

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Project” was not successful and that Smith & Tomyak had been defrauded by a European contact
by the name of “Max” and other individuals in Europe. The Respondent then advised former
client WS that, through various contacts at the United States Central Intelligence Agency, the
Bank of Canada, the Royal Canadian Mounted Police, private investigators and other European
authorities, he was working on obtaining WS’s $26,000 in an effort to reimburse him.

11.
Among other misleading communications to former client WS, the Respondent sent the
following emails in response to complaints received from client WS, which purported to describe
the Respondent’s efforts to obtain and reimburse to client WS the $26,000 he had invested in
Smith & Tomyak:

September 28, 2004: “As far as Poland goes, the drafts are physically at our bank
in Ottawa. They arrived on Friday afternoon. Clearing time for them is estimated
by the bank to be THREE WEEKS. Please note that they are in EURO
DOLLARS.”

October 28, 2004:
“The bank drafts have been confirmed by the National Bank
of Poland. Now they are being cleared by the Bank of Montreal, the Canadian
corresponding bank that is the liaison between the National Bank of Poland and
the CIBC.”

June 27, 2006:
“Finally to bring you up-to-date, I have spoken to a direct
assistant to Bank of Canada Governor, [DD], who is both a banker and a lawyer,
who told me that if we don’t get results in the next week or two, we need to
contact the head office of the ING Bank in Amsterdam and complain about our
treatment, and we need to get the assistance of a Swiss lawyer (I have already
made contact with the Swiss lawyer through a business associate) to approach the
bank.”

October 18, 2006: Forwarding an email from the Respondent to his
European contact named “Max” which read as follows:
“Max: No money and
No paperwork. I’m on the plane to Switzerland to see the proper authorities. You
ruined my life now I will return the favour. By the way, [MG], my friend and the
President of the HSBC Bank in the USA, has told me that he is on a personal
vendetta to stamp out corruption in the world banking system which is tarnishing
the reputation of all of the legitimate world banks. He also says that he is friends
with the President of the ING Bank. I will see you in Geneva.”

November 13, 2006:
“I spoke to Chris today. He is currently in Geneva finalizing
the transfer. Once things have been properly finalized in order to set up a bank
account for transfer purposes, and there is a plethora of paperwork for non-
residents to accomplish this, he will go to Paris to set up the account with the
BNP Bank.”

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May 17, 2007: “I am quite certain that I told you before that I hired a former CIA
Agent, [AL] by name who is now retired to track down the missing funds from
the infamous CASE FROM HELL. Mr. [AL] has used his banking contact to
track the corporate funds which are located in an Italian Bank. At the present
time, he is using court proceedings in Italy to recover these funds, and
HOPEFULLY, VERY SOON, we will be able to recover our original
investment.”

June 7, 2007:
“We are 90% of the way there. Charges are currently being laid by
the Italian Police against the guilty parties. Once this has been finalized, the
money will follow.”

July 23, 2007: “
This Friday our investigator from Singapore, [AL], will be in
Ottawa to meet with the RMCP in order to present evidence and bring our case to
a conclusion. I will head to Europe in a week or two following this in order to
pick up the frozen funds.”

12.
There is no evidence that S&T ever had any business dealings in Poland in the first place
or that any of the above-described events occurred, apart from the Respondent’s unsubstantiated
claims.

13.
On December 13, 2007, following his resignation from Quadrus, the Respondent
counseled former client WS to make an adjustment to his tax information filed for the 2006 tax
year to include a $13,000 small business investment loss resulting from WS’s investment in
Smith & Tomyak.

14.
On January 16, 2008, the Respondent provided former client WS with a personal
Promissory Note stating that: “In order to compensate [WS] for his investment loss of
$26,000.00 CDN in the company, [Smith & Tomyak], I hereby agree to repay [WS] the sum of
$26,000 CDN, without interest, on or before December 31st, 2008”.

15.
WS has never received any payments on account of his investment in Smith & Tomyak,
despite the terms of the January 16, 2008 Promissory Note and a subsequent judgment against
the Respondent obtained by WS in the Ontario Superior Court of Justice.

16.
The first time Quadrus became aware of the Complaint was on August 25, 2008, when
WS filed a complaint with Quadrus.

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17.
Between March 8, 2002 and February 20, 2007, by having and continuing with a profit
sharing agreement and a co-investing arrangement with former client WS in respect of Smith &
Tomyak, in which client WS had invested a total of $26,000, the Respondent engaged in
personal financial dealings with client WS, thereby giving rise to an actual or potential conflict
of interest between the Respondent and former client WS which the Respondent failed to address
by the exercise of responsible business judgment influenced only by the best interests of client
WS, contrary to MFDA Rules 2.1.4 and 2.1.1..

18.
By deliberately misleading former client WS about the status of his investment in Smith
& Tomyak, the Respondent failed to deal fairly, honestly and in good faith with client WS,
contrary to MFDA Rule 2.1.1.

19.
By failing to inform Quadrus of former client WS’s repeated complaints between 2004
and 2008 and attempting to settle the complaints without the Member’s involvement, the
Respondent acted contrary to MFDA Policy No. 3 and MFDA Rules 2.11 and 2.1.1.

20.
By doing so, the Respondent also failed to comply with Quadrus’ policies and
procedures, thereby interfering with the Member’s ability to supervise the Respondent and
comply with its obligations under MFDA Rule 2.11, contrary to MFDA Rules 1.1.2 and 2.5.1,
and MFDA Rule 2.1.1.

Allegation #5

21.
On October 6, 2008, former client WS filed a written complaint with the MFDA about
the Respondent and his $26,000 investment in Smith & Tomyak.

22.
On April 30, 2009, during the course of its investigation, MFDA Staff wrote to the
Respondent and requested that he provide a number of documents for inspection no later than
May 14, 2009.

23.
On May 13, 2009, following a request made by the Respondent, MFDA Staff agreed to
extend the Respondent’s deadline for providing the requested documents to June 1, 2009.

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24.
On June 2, 2009, following the Respondent’s failure to provide the required documents to
MFDA Staff, the Respondent sent an email to MFDA Staff stating that “…[a]s soon as I can
reasonably assemble the information you have requested, I will immediately courier it to you.”
That same date, MFDA Staff replied to the Respondent and advised him that:

The request made in [Staff’s] letter dated April 30, 2009 was made
in accordance with MFDA By-Law 1, section 22. You are required
to comply with our request for documents in accordance with your
obligations as an Approved Person as set out in section 22.1 of
MFDA By-law No. 1. Notwithstanding that you are no longer an
Approved Person of [Quadrus] your obligations as an Approved
Person continue for a period of five years following your
termination, in accordance with section 24.1.4 of MFDA By-law
No. 1.

25.
Replying to Staff’s letter dated June 2, 2009, the Respondent sent a same day email to
Staff stating: “Message received and understood.” Nevertheless, Staff has never received the
requested documents from the Respondent and has never again heard from the Respondent.

26.
By failing to produce for inspection copies of documents and records requested by
MFDA Staff during the course of an investigation, the Respondent therefore acted contrary to
section 22.1 of MFDA By-law No. 1.

NOTICE is further given that the Respondent shall be entitled to appear and be heard and be
represented by counsel or agent at the hearing and to make submissions, present evidence and
call, examine and cross-examine witnesses.

NOTICE is further given that MFDA By-laws provide that if, in the opinion of the Hearing
Panel, the Respondent:

ƒ has failed to carry out any agreement with the MFDA;
ƒ has failed to comply with or carry out the provisions of any federal or provincial
statute relating to the business of the Member or of any regulation or policy made
pursuant thereto;
ƒ has failed to comply with the provisions of any By-law, Rule or Policy of the MFDA;

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ƒ has engaged in any business conduct or practice which such Regional Council in its
discretion considers unbecoming or not in the public interest; or
ƒ is otherwise not qualified whether by integrity, solvency, training or experience,
the Hearing Panel has the power to impose any one or more of the following penalties:

a) a reprimand;

b) a fine not exceeding the greater of:

i. $5,000,000.00 per offence; and

ii. an amount equal to three times the profit obtained or loss avoided by such
person as a result of committing the violation.

c) suspension of the authority of the person to conduct securities related business for
such specified period and upon such terms as the Hearing Panel may determine;

d) suspension of the authority of the person to conduct securities related business for
such specified period and upon such terms as the Hearing Panel may determine;

e) revocation of the authority of such person to conduct securities related business;

f) prohibition of the authority of the person to conduct securities related business in any
capacity for any period of time;

g) such conditions of authority to conduct securities related business as may be
considered appropriate by the Hearing Panel.

NOTICE is further given that the Hearing Panel may, in its discretion, require that the
Respondent pay the whole or any portion of the costs of the proceedings before the Hearing
Panel and any investigation relating thereto.

NOTICE is further given that the Respondent must serve a Reply on Enforcement Counsel and
file a Reply with the Corporate Secretary within twenty (20) days from the date of service of this
Notice of Hearing

A Reply shall be served upon Enforcement Counsel at:
Mutual Fund Dealers Association of Canada
121 King Street West, Suite 1000
Toronto, Ontario, M5H 3T9
Attention: Shelly Feld, Senior Enforcement Counsel
Facsimile: 416-361- 9073

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Email: [email protected]

A Reply shall be filed by:
a) providing 4 copies of the Reply to the Corporate Secretary by personal delivery, mail
or courier to:

Mutual Fund Dealers Association of Canada
121 King Street West, Suite 1000
Toronto, Ontario
M5H 3T9
Attention: Office of the Corporate Secretary; or

b) transmitting 1 copy of the Reply to the Corporate Secretary by fax to fax number
416-361-9781, provided that the Reply does not exceed 16 pages, inclusive of the
covering page, unless the Corporate Secretary permits otherwise; or

c) transmitting 1 electronic copy of the Reply to the Corporate Secretary by e-mail at
[email protected].

A Reply may either:

i.) specifically deny (with a summary of the facts alleged and intended to be relied upon
by the Respondent, and the conclusions drawn by the Respondent based on the
alleged facts) any or all of the facts alleged or the conclusions drawn by the MFDA in
the Notice of Hearing; or

ii.) admit the facts alleged and conclusions drawn by the MFDA in the Notice of Hearing
and plead circumstances in mitigation of any penalty to be assessed.

NOTICE is further given that the Hearing Panel may accept as having been proven any facts
alleged or conclusions drawn by the MFDA in the Notice of Hearing that are not specifically
denied in the Reply.

NOTICE is further given that if the Respondent fails:

a. to serve and file a Reply; or
b. attend at the hearing specified in the Notice of Hearing, notwithstanding that a Reply
may have been served,

the Hearing Panel may proceed with the hearing of the matter on the date and the time and place
set out in the Notice of Hearing (or on any subsequent date, at any time and place), without any
further notice to and in the absence of the Respondent, and the Hearing Panel may accept the

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facts alleged or the conclusions drawn by the MFDA in the Notice of Hearing as having been
proven and may impose any of the penalties described in the By-Laws.
End.
Doc 242490

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