Notice of Hearing

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 January 2012 until July 2014, the Respondent was registered as a mutual fund salesperson (now known as a dealing representative) with FundEX Investments Inc. (“FundEX”), a Member of the MFDA.

2. From January 20, 2012 until May 12, 2014, the Respondent was designated a branch manager at a branch located at 25 Main Street, Suite 1210, Hamilton Ontario (the “Branch”). As a result of the events described herein, FundEX suspended the Respondent’s activities as a branch manager on or about May 9, 2014, and terminated him on July 24, 2014.

3. The Respondent has not been registered in the securities industry in any capacity since July 24, 2014.

Background

4. Scott Reeves (“Reeves”) was registered as a mutual fund salesperson with FundEX from January 2004 to May 9, 2014 when he was terminated as a result of the events described in paragraph 12 below.

5. Scott Reeves (“Reeves”) owned the Branch and operated it under the approved trade name, Reeves Financial Services Inc. (“Reeves Financial Services”). Reeves was the sole officer and director of Reeves Financial Services.

6. Reeves is currently the subject of an MFDA disciplinary proceeding[1], where Staff has alleged that:
   1. between 2004 and May 9, 2014, Reeves solicited and accepted from at least three clients a total of approximately $5,064,208, some or all of which Reeves deposited into accounts that he controlled, which Reeves failed to invest, return or otherwise account for, contrary to MFDA Rule 2.1.1., 1.1.1, 2.1.4;
   2. between 2010 and 2014, on at least 34 instances, Reeves directed the Member to deposit redemptions totaling approximately $1,126,117 from a client’s account at the Member to a bank account that did not belong to the client, by providing the Member with a void cheque that had been altered so that it appeared to the Member that the cheque corresponded to the client’s bank account when the client did not hold such an account, contrary to MFDA Rule 2.1.1;
   3. between 2009 and May 9, 2014, Reeves made statements and provided documents to at least three clients, which he knew were false, misleading or incorrect, and misrepresented to the clients the amounts and whereabouts of their investments and monies, contrary to MFDA Rule 2.1.1; and
   4. between January 8, 2004 and May 9, 2014, Reeves had and continued in other gainful occupations that were not disclosed to and approved by the Member by acting as an officer or a director for at least 11 corporations, contrary to MFDA Rules 1.2.1(c) (formerly MFDA Rule 1.2.1(d)) and 2.1.1.

7. Reeves was also charged with a number of criminal offences with respect to conduct described in paragraph 6 above. The criminal proceeding against Reeves is currently ongoing in the Ontario Superior Court of Justice in Hamilton, Ontario.

8. Staff does not allege that the Respondent was aware that Reeves’ was misappropriating client monies and misleading clients with respect to the whereabouts of their monies, or that the Respondent participated in any of these activities.

Contravention #1 – Undisclosed Outside Business Activities

9. At all material times, FundEX’s policies and procedures with respect to outside business activities stated the following:
   1. FundEX must be aware and approve of Representatives who wish to engage in another occupation before the Representative engages in such activity.  Representatives must notify Head Office Compliance in writing, using the “Outside Business Activity Approval Form,” of any employment or occupation proposed other than as a Representative dealing in mutual funds and related products for FundEX.  On the Outside Activity Approval Form Representatives must provide details such as:
      • Name and nature of the business;
      • The title or position of the Representative;
      • The number of hours to be devoted to the business;
      • A description of any potential for confusion or conflicts of interest; and
      • Any applicable fees for the service provided through the business.

10. On November 7, 2011, the Respondent completed a FundEX Due Diligence Questionnaire in which he disclosed that he conducted business using the trade name, “Reeves Financial”. At that time, the Respondent also completed a FundEX Outside Business Activity Approval form in which he disclosed “Reeves Financial Services” as an outside business activity, that he held the title of “Director Insurance Sales and Business Development” at Reeves Financial Services, and that he is engaged in activities related to the sale of life insurance.

11. On October 23, 2012, Reeves incorporated “Reeves Wealth Services Corp.” (“Reeves Wealth”). FundEX subsequently approved the trade name, Reeves Wealth Services.

12. The Respondent did not disclose to FundEX that he was named as the President and a Director of Reeves Wealth.

13. On October 23, 2012, Reeves incorporated “Reeves Group Solutions Limited” (“Reeves Group”). Reeves did not disclose Reeves Group to FundEX for approval.

14. The Respondent did not disclose to FundEx that he was named as a Director of Reeves Group.

15. By engaging in the conduct described above, the Respondent failed to disclose to the Member two outside business activities for which he was named officer and/or director, contrary to MFDA Rules 1.2.1(c) (now Rule 1.3.2) and 2.1.1.

Contravention #2 – Failure to Report Outside Business Activities Operating at the Branch

16. At all material times, FundEX’s Branch Manager Manual, stated the following:
    1. The [branch manager] has two primary roles at FundEX:
       • The first role is trade review and account supervision; and
       • The second is to act as FundEX’s eyes and ears for front-line compliance at the branch supervising the activities of Representatives within their branch and sub-branch locations.
    2. *          *          *
    3. Branch Manager General Responsibilities
       Ensure that the business conducted on behalf of FundEX by a Representative and other employees and agents at the branch is in compliance with regulations and FundEX’s policies and procedures.
    4. *          *          *
    5. Promote prudent business practices at the branch and ensure adherence to all applicable securities rules, regulations and policies.
    6. *          *          *
    7. Administrative Duties … Immediately advise the [Regional Branch Manager] of any irregularities or contravention of any pertinent regulation of compliance policies by Representatives of the branch

17. The signage posted at the entrance of the Branch listed the following business entities as operating out of the location:
    1. Reeves Financial Group;
    2. Reeves Financial Services Inc.;
    3. Reeves Group Solutions Limited;
    4. Reeves Mortgage Solutions Inc.;
    5. Reeves Private Wealth Inc.;
    6. Reeves Wealth Services Corporation;
    7. Reeves Portfolio Management Inc.; and
    8. Reeves Financial Charitable Foundation.

18. Only Reeves Financial Services Inc. and Reeves Wealth Services Corporation had been disclosed to FundEX and approved by it.

19. FundEX first became aware of the remaining outside business activities when its representatives attended at the Branch on May 9, 2014 for an unannounced visit in response to a complaint against Reeves.

20. In his capacity as branch manager, the Respondent failed to:
    1. determine whether the outside business activities listed on the signage at the entrance of the Branch had been disclosed to FundEX and approved by it; and
    2. report any undisclosed/unapproved outside business activities to FundEX; and
    3. report to FundEX that signage for these entities was located at the entrance of the Branch.

21. By engaging in the conduct described above, in his capacity as branch manager, the Respondent did not adequately query or report to the Member unapproved outside business activities at the branch location supervised by the Respondent, contrary to MFDA Rules 2.5.5(f) and 2.1.1.

Contravention #3 – Failure to report the Branch’s financial difficulties

22. From late December 2013 to April 2014, the Respondent failed to notify FundEX of various red flags about which the Respondent became aware concerning financial difficulties experienced by Reeves’ or Reeves Financial Services at the Branch.

23. During 2013 and 2014, the Respondent, in his capacity as branch manager, failed to advise FundEX of the following information he became aware of at the Branch:
    1. the Respondent and at least 3 other employees were not paid their salaries for a period of 6 to 15 weeks;
    2. employees did not receive RSP/employee contributions for 2013;
    3. expenses at the Branch where not paid as they came due such that it was necessary to put in place payment plans with service providers, including the Branch’s landlord, leasing companies, and a telecommunications company;
    4. the Respondent personally made a $3,500 payment of expenses at the Branch, including a furniture leasing company and a human resources company; and
    5. the Respondent personally loaned a total of $20,000 to Reeves and Reeves Financial Services in exchange for a promissory note dated March 17, 2014, to assist with paying expenses at the Branch, including to the Branch’s landlord.

24. If the Respondent had alerted FundEX of the information he was aware of concerning the financial difficulties of the Branch, FundEX would have been obligated to conduct a reasonable supervisory investigation into the activities of the Branch which would have increased the likelihood that Reeves’ conduct would have been detected.

25. By engaging in the conduct described above, the Respondent, in his capacity as a branch manager, failed to adequately query or advise the Member of information concerning financial difficulties at the branch location supervised by the Respondent, contrary to MFDA Rules 2.5.5(f) and 2.1.1.

Contravention #4 – Failure to Report the Termination of an Approved Person at the Branch

26. At all material times, FundEX’s Branch Manager Manual provides:
    1. Duties of the BM include … Ensure that the Registration Officer is notified immediately (within 5 business days) in writing of material changes to registration for Representatives under his/her supervision…

27. The Respondent was aware that, on April 6, 2014, Reeves terminated SZ, an Approved Person at the Branch. SZ was also licensed to sell insurance.

28. In his capacity as branch manager, the Respondent did not report the termination to FundEX.

29. The Respondent, as branch manager, was obligated to notify FundEX of SZ’s termination from the Branch in accordance with FundEX’s policies and procedures, and securities legislation requirements.

30. By engaging in the conduct described above the Respondent failed to report to the Member that an Approved Person, who was the owner and operator of the branch location supervised by the Respondent, terminated another Approved Person at the branch, contrary to MFDA Rules 1.1.2, 2.5.1, 2.1.1, and National Instrument 31-109.

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:

• has failed to carry out any agreement with the MFDA;
• 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;
• has failed to comply with the provisions of any By-law, Rule or Policy of the MFDA;
• has engaged in any business conduct or practice which such Regional Council in its discretion considers unbecoming or not in the public interest; or
• 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. revocation of the authority of such person to conduct securities related business;
5. prohibition of the authority of the person to conduct securities related business in any capacity for any period of time;
6. 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 Office of 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, ON M5H 3T9
Attention: David Halasz
Fax:  416-361-9073
Email: [email protected]

A Reply shall be filed by:

1. providing 4 copies of the Reply to the Office of the Corporate Secretary by personal delivery, mail or courier to:
   1. Mutual Fund Dealers Association of Canada
      121 King Street West, Suite 1000
      Toronto, ON M5H 3T9
      Attention: Office of the Corporate Secretary; or
2. transmitting one (1) copy of the Reply to the Office of 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 Office of the Corporate Secretary permits otherwise; or
3. transmitting one (1) electronic copy of the Reply to the Office of the Corporate Secretary by e-mail at [email protected].

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] The hearing on the merits in MFDA File No. 201509 is currently scheduled to occur on October 19-20, 2016.