MFDA Notice of Hearing

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201037

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

Scott C. Armstrong

Notice of Hearing

NOTICE is hereby given that a first appearance will take place by teleconference before a hearing panel (the “Hearing Panel”) of the Atlantic Regional Council of the Mutual Fund Dealers Association of Canada (the “MFDA”) on March 25, 2011 at 10:00 a.m. (Atlantic), or as soon thereafter as the appearance can be held, concerning a disciplinary proceeding commenced by the MFDA against Scott C. Armstrong (the “Respondent”). Members of the public who want to listen to the teleconference should contact Marco Wynnyckyj, MFDA Hearings Coordinator, at 416-945-5146 or by email at mwynnyckyj@mfda.ca to obtain particulars. The Hearing on the Merits will take place in Saint John, New Brunswick at a time and venue to be announced

DATED: Jan 19, 2011

"Jason Bennett"

Jason Bennett

Corporate Secretary

Mutual Fund Dealers Association of Canada
121 King St. West, Suite 1000
Toronto, ON M5H 3T9
Telephone: 416-943-7431
Fax: 416-361-9781
E-mail: corporatesecretary@mfda.ca



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

Allegation #1: Between about 2007 and 2008, the Respondent facilitated an investment by client AL in the amount of $40,000 in a corporation, Armstrong Financial Services Inc. (“Armstrong Financial”), in which the Respondent had a direct or indirect interest, in a manner which preferred his own interests over those of client AL and which failed to deal with client AL fairly, honestly and in good faith, contrary to MFDA Rules 2.1.4 and 2.1.1.

Allegation #2: Between about 2007 and 2008, the Respondent induced client AL to sign an agreement whereby client AL released any claim to ownership of shares of Armstrong Financial and resigned as an officer or director of Armstrong Financial in exchange for the Respondent promising to pay client AL $62,000, which the Respondent subsequently failed to do, thereby preferring his own interests over those of client AL and failing to deal fairly, honestly and in good faith with client AL, contrary to MFDA Rules 2.1.4 and 2.1.1.

Allegation #3: Between 2007 and 2008, the Respondent engaged in personal financial dealings with client AL by signing a promissory note in the amount of $62,000 payable by him to client AL in satisfaction of debts owed primarily by Armstrong Financial and Gateway Capital Growth Inc. (“Gateway”) to client AL and thereafter failing to pay client AL in accordance with the terms of the promissory note, contrary to MFDA Rules 2.1.4 and 2.1.1.

240235

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. From May 1999 to December 2008, the Respondent was registered in New Brunswick as a mutual fund salesperson with Gateway, formerly known as Armstrong Financial.
  1. On December 22, 2008, Gateway suspended the Respondent as a result of the events described below. The Respondent subsequently resigned from Gateway on December 30, 2008.
  1. The Respondent is not currently registered in the securities industry in any capacity.
  1. Armstrong Financial became a member of the MFDA on April 12, 2002. On November 29, 2008, Armstrong Financial changed its name to Gateway. On January 28, 2010, Gateway filed a notice of intention to resign its membership with the MFDA.[1]

Client AL Invests in Armstrong Financial

  1. At all material times prior to August 2008, the Respondent was a controlling mind and authorized signing officer of Armstrong Financial and managed its day-to-day operations.
  1. Client AL is a retired school principal. At all material times, client AL was a client of Armstrong Financial and the Respondent was the mutual fund salesperson responsible for serving his account.
  1. In 2007, the Respondent became aware that 7 of the 11 existing shareholders of Armstrong Financial wanted to redeem their shareholdings and either sell or shut down Armstrong Financial. The seven existing shareholders represented approximately 405 of the 460 outstanding shares of Armstrong Financial.
  1. The Respondent approached client AL and recommended that client AL and the Respondent purchase ownership of Armstrong Financial.[2]
  1. On or about August 1, 2007, the Respondent attended a special meeting of Armstrong Financial’s shareholders. During the meeting, the Respondent requested and received permission from the shareholders for client AL and himself to raise capital to purchase the company.
  1. The Respondent subsequently advised client AL that an agreement (hereinafter referred to as the “Share Purchase Agreement”) had been reached with the existing shareholders of Armstrong Financial. There is no evidence that the Share Purchase Agreement was ever reduced to writing or signed by the parties involved. Client AL relied on the Respondent for information concerning the status and negotiation of the Share Purchase Agreement. Under the terms of the Share Purchase Agreement:
    1. Armstrong Financial would buy back the shares held by 7 of the 11 existing shareholders of Armstrong Financial, representing approximately 405 of the 460 outstanding shares of the company;
    2. client AL would purchase 300 shares issued by Armstrong Financial at a price of $40,000;
    3. the Respondent would purchase 330 shares issued by Armstrong Financial at a price of $50,000; and
    4. client AL would become the President of Armstrong Financial.
  1. The Respondent led client AL to believe that following the completion of the Share Purchase Agreement, client AL and the Respondent would own approximately 630 of the 685 shares of Armstrong Financial and would, as a consequence, together constitute the de facto owners and operators of Armstrong Financial.
  1. On or about September 4, 2007, in furtherance of the Share Purchase Agreement, client AL delivered a cheque to the Respondent in the amount of $40,000 payable to Armstrong Financial for the purchase of 300 shares of Armstrong Financial (the “Share Purchase Cheque”).
  1. The Respondent arranged for the Share Purchase Cheque to be deposited into Armstrong Financial’s business account.
  1. Following the deposit of the Share Purchase Cheque, the Respondent failed to take any or adequate steps to cause or ensure that Armstrong Financial issued shares to client AL in accordance with the terms of the Share Purchase Agreement. At no time did the Respondent provide or arrange for client AL to be provided with share certificates or evidence of his investment in Armstrong Financial.
  1. Notwithstanding the Respondent’s representation that client AL would become the President of Armstrong Financial, client AL was not allowed to become, nor did he otherwise act, as its President. The Respondent remained in control of both the overall affairs and day-to-day operations of the Armstrong Financial.
  1. The Respondent did not purchase any shares of Armstrong Financial as contemplated by the Share Purchase Agreement or otherwise invest $50,000 in Armstrong Financial, nor did the Respondent inform client AL that he had not carried through on his obligations under the Share Purchase Agreement. Thereafter, by his acts, omissions and representations, the Respondent led client AL to believe that the terms of the Share Purchase Agreement had been completed as originally contemplated, when the Respondent knew that to be false.
  1. Between November 19, 2007 and March 1, 2008, Armstrong Financial redeemed the shares held by 7 of the 11 existing shareholders, as described in paragraph 7 above. During this period, Armstrong Financial issued cheques to these shareholders in the total amount of $172,750. The cheques were co-signed by the Respondent on behalf of Armstrong Financial.[3] The cheques were drawn on Armstrong Financial’s business account, the same account into which client AL’s $40,000 cheque had been deposited by the Respondent.
  1. During approximately the same period, the Respondent received payments (by cheque and direct deposit into his personal bank account) of at least $50,000 from Armstrong Financial. The payments were made to the Respondent as purported commission advances. Where the payments were made by cheque, the cheques were co-signed by the Respondent on behalf of Armstrong Financial.[4] The cheques were drawn on Armstrong Financial’s business account, the same account into which client AL’s $40,000 cheque had been deposited by the Respondent.
  1. Client AL was not aware that the Respondent was receiving purported commission advances from Armstrong Financial.
  1. By facilitating client AL’s investment in Armstrong Financial in the manner described above, the Respondent preferred his own interests to those of client AL and failed to deal fairly, honestly and in good faith with client AL, contrary to MFDA Rules 2.1.4 and 2.1.1.

The Respondent Facilitates the Purchase of Armstrong Financial by LH

  1. In early March 2008, Armstrong Financial was designated in early warning because it had failed to maintain sufficient risk adjusted capital (“RAC”) in accordance with MFDA Rule 3.4.2(a).
  1. In order to rectify the RAC deficiency, the Respondent entered into a Uniform Subordinated Loan Agreement[5] dated March 11, 2008 with Armstrong Financial and the MFDA (the “Subordinated Loan”), whereby the Respondent loaned the sum of $66,000 to Armstrong Financial.
  1. An individual, LH was the source (directly or indirectly) of the monies provided by the Respondent under the Subordinated Loan.
  1. At about this time, the Respondent advised client AL that Armstrong Financial would soon become bankrupt unless the company was purchased by LH. LH was not known to client AL.
  1. To facilitate the purchase of Armstrong Financial by LH, the Respondent requested that client AL sign an agreement stating that client AL released any claim to ownership of shares of Armstrong Financial and resigned as an officer and director of Armstrong Financial (the “Release”). The Respondent advised client AL that:
    1. his investment in Armstrong Financial would be repaid once LH purchased Armstrong Financial; and
    2. LH would not purchase Armstrong Financial unless client AL signed the Release.
  1. Client AL refused to sign the Release until he received legal advice and received some form of payment for his investment in Armstrong Financial.
  1. At that time, the Respondent offered to sign a promissory note in the amount of $62,000 payable by the Respondent personally to client AL, if client AL signed the Release. This amount represented the repayment of client AL’s investment in Armstrong Financial and an earlier investment by client AL in a car repair shop which the Respondent had also facilitated.
  1. As an inducement, the Respondent also offered to provide client AL with an immediate payment in the amount of $10,000 against the balance due under the proposed promissory note, if client AL signed the Release.
  1. The Respondent represented to client AL that he had sufficient assets to pay the full amount of the proposed promissory note. This representation was false, misleading or contained material omissions as the Respondent had insufficient assets to pay his then existing debts. In particular, the Respondent failed to inform client AL that he owed:
    1. at least $70,000 to Armstrong Financial for the repayment of purported commission advances he had received from the company between 2007 and 2008;
    2. at least $66,000 to LH in respect of the Subordinated Loan; and
    3. at least $386,000 to the Canada Revenue Agency in respect of unpaid income taxes.
  1. By inducing client AL to sign the Release in the manner described above and thereafter failing to pay client AL the full amount owing to him on the promissory note, the Respondent preferred his own interests over those of client AL and failed to deal fairly, honestly and in good faith with client AL, contrary to MFDA Rules 2.1.4 and 2.1.1.

The Respondents Signs a Promissory Note Payable to Client AL

  1. On or about May 7, 2008, the Respondent signed a promissory note in the amount of $62,000 payable by the Respondent to client AL (the “Promissory Note”). The Promissory Note was due to be paid in full by June 7, 2008.
  1. The Respondent subsequently delivered a cheque dated May 7, 2008 in the amount of $10,000 payable by Armstrong Financial to client AL (the “Release Cheque”). The Cheque was co-signed on behalf of Armstrong Financial by the Respondent.
  1. At the time client AL received the Release Cheque, client AL signed the Release and provided it to the Respondent.
  1. The Respondent did not make any further payments on account of the remainder (i.e. $52,000) owing on the Promissory Note by June 7, 2008.
  1. On June 9, 2008, client AL offered, through his counsel, to extend the due date for payment of the remainder owing on the Promissory Note from June 7, 2008 to June 17, 2008.
  1. The Respondent did not pay the remainder of the Promissory Note by June 17, 2008.
  1. On or about June 21, 2008, the Respondent provided a handwritten note to client AL which stated that the Respondent would pay the amount owed under the Promissory Note, as well as additional interest charges incurred by client AL[6], by paying the following amounts to client AL:
    1. 10 percent of his bi-weekly earnings from Armstrong Financial; and
    2. the minimum interest payment due on client AL’s line of credit.
  1. With the exception of one payment in the amount of $500, the Respondent did not make any further payments to client AL in accordance with this handwritten note or otherwise.
  1. On or about August 20, 2008, LH purchased 665 of the 685 outstanding shares of Armstrong Financial for a total of $66.50 or $0.10 per share. Client AL was not paid any amounts following the purchase of Armstrong Financial by LH.
  1. In September 2008, RA and ET, the Chief Compliance Officer and Branch Manager of Armstrong Financial respectively, sent a letter on behalf of Armstrong Financial to the MFDA requesting approval of a change in ownership of Armstrong Financial. The letter stated that client AL no longer wanted to be an owner of Armstrong Financial because he wished to pursue other endeavors and could not allocate the time required by Armstrong Financial.
  1. The information set out in the letter to the MFDA was false, misleading or contained material omissions. The Respondent provided this information to RA and ET when he was aware that it would be provided to the MFDA in support of the request to approve a change in ownership of Armstrong Financial.
  1. On about October 20, 2008, client AL commenced a civil action in the Court of Queen’s Bench of New Brunswick against the Respondent claiming the sum of $51,500 (i.e. the unpaid portion of the Promissory Note).
  1. On or about December 1, 2008, the Respondent filed for bankruptcy under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3.
  1. On December 3, 2008, client AL obtained Judgment from the Court of Queen’s Bench of New Brunswick against the Respondent in the amount of $51,500 and costs of $629.10.[7] Client AL as not received any payments on account of the Judgment.
  1. By virtue of the foregoing conduct with respect to the Release and the Promissory Note, the Respondent engaged in personal financial dealings and failed to deal fairly, honestly and in good faith, with client AL, contrary to MFDA Rules 2.1.4 and 2.1.1.

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:

  1. has failed to carry out any agreement with the MFDA;
  2. 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;
  3. has failed to comply with the provisions of any By-law, Rule or Policy of the MFDA;
  4. has engaged in any business conduct or practice which such Regional Council in its discretion considers unbecoming or not in the public interest; or
  5. 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:

  1. a reprimand;
  2. a fine not exceeding the greater of:
    1. $5,000,000.00 per offence; and
    2. an amount equal to three times the profit obtained or loss avoided by such person as a result of committing the violation.
  3. 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;
  4. 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;
  5. revocation of the authority of such person to conduct securities related business;
  6. prohibition of the authority of the person to conduct securities related business in any capacity for any period of time;
  7. 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: Charles Toth, Enforcement Counsel
Facsimile: 416-361- 9073
Email: ctoth@mfda.ca

A Reply shall be filed by:

  1. providing 4 copies of the Reply to the Corporate Secretary by personal delivery, mail or courier to:
    1. Mutual Fund Dealers Association of Canada
      121 King Street West, Suite 1000
      Toronto, Ontario
      M5H 3T9
      Attention: Office of the Corporate Secretary; or
  2. 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
  3. transmitting 1 electronic copy of the Reply to the Corporate Secretary by e-mail at CorporateSecretary@mfda.ca.

A Reply may either:

  1. 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
  2. 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:

  1. to serve and file a Reply; or
  2. 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 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.

[1] In accordance with s. 13 of MFDA By-law No. 1, Gateway’s application to resign its membership with the MFDA remains pending subject to the completion of unresolved enforcement matters.
[2] At that time, client AL owned 10 shares of Armstrong Financial.  The Respondent did not own any shares of Armstrong Financial.
[3] The cheques were also signed by Armstrong Financial’s Branch Manager, ET.
[4] The cheques were also signed by Armstrong Financial’s Branch Manager, ET.
[5] In the form required and prescribed by the MFDA.
[6] As a result of the Respondent’s failure to repay the Promissory Note, client AL was unable to repay his line of credit and was, therefore, incurring ongoing interest charges.
[7] The Respondent did not defend the action and client AL obtained default judgment against the Respondent.