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 July 4, 2000 to May 16, 2013, the Respondent was registered in Ontario as a mutual fund salesperson (now known as a dealing representative) with W.H. Stuart Mutuals Ltd. (“W.H. Stuart”), a former Member of the MFDA.

2. From May 17, 2013 to November 3, 2015, the Respondent was registered in Ontario as a mutual fund salesperson (now dealing representative) with Keybase Financial Group Inc. (“Keybase”), a Member of the MFDA.

3. The Respondent is no longer registered in the securities industry in any capacity.

4. At all material times, the Respondent conducted business in Sudbury, Ontario.

Background

5. At all material times, the Respondent held online trading accounts in which he personally invested in various non-mutual fund securities, including precious metals equity securities. The Respondent also engaged in foreign exchange trading.

6. Commencing in at least 2003 and continuing to November 3, 2015, the Respondent:
   1. arranged for at least 81 clients and 40 other individuals to open online discount brokerage accounts (“Trading Accounts”) at financial institutions outside of W.H. Stuart and later Keybase;
   2. recommended that the clients and other individuals deposit monies in the Trading Accounts either from savings or lines of credit (which he also recommended);
   3. requested and obtained the login information (including user names and passwords) for the Trading Accounts from the clients and other individuals;
   4. accessed the Trading Accounts using the login information provided by the clients and other individuals and processed trades in respect of non-mutual fund securities, including precious metals equity securities, and engaged in foreign exchange trading.

7. The Respondent recommended and processed trades in the Trading Accounts which were similar to the trades processed by the Respondent in his personal online trading accounts.

8. The Respondent exercised discretion with respect to some or all elements of the trades that he processed for clients and other individuals in Trading Accounts, including the selection of which securities would be traded, the amounts of each security to be traded, the prices at which trades were executed, and the timing of those trades.

9. In addition to directly processing trades in the Trading Accounts, the Respondent also made trade recommendations to the clients and other individuals and advised them to execute trades in their Trading Accounts on their own.

10. The Respondent charged the 81 clients and 40 other individuals fees at least $70,000 for investment advice and for processing trades in the Trading Accounts as described above. These fees were paid to the Respondent personally and not to the Members with which he was registered.

11. In the event that the fees that the Respondent charged for servicing online trading accounts were not paid, the Respondent advised the clients and other individuals that he would discontinue servicing their Trading Accounts and deprive them of opportunities to ‘lock in’ profit positions in those accounts.

12. At all material times, the Respondent was not registered to provide advice or process trades in equity securities or conduct foreign exchange trading.

13. In addition, the Respondent was aware that he was not registered nor authorized to provide advice or facilitate trades in securities for clients or other individuals other than securities approved for sale and processed through the facilities of the Members with which he was registered.

14. None of the trades recommended and/or processed by the Respondent in respect of the Trading Accounts were carried on for the account or through the facilities of W.H. Stuart or Keybase.

15. Neither W.H. Stuart nor Keybase were aware of the Respondent’s activities with respect to the Trading Accounts.

16. At all material times, the Respondent maintained documents and files relating to his activities with respect to the Trading Accounts, but these were maintained separate from Member files and were inaccessible to H. Stuart and Keybase.

Allegation #1 – Securities Related Business Outside the Member

17. By engaging in the conduct described above, the Respondent engaged in securities related business that was not carried on for the account or through the facilities of the Members he was registered with, by:
    1. arranging for at least 81 clients and 40 other individuals to open online discount brokerage accounts outside the Members; and/or
    2. recommending trades, processing trades or otherwise conducting acts in furtherance of trades with respect to securities for the accounts;

    contrary to MFDA Rules 1.1.1 and 2.1.1, and the terms of the Respondent’s registration in the securities industry.

Allegation #2 – Undisclosed Dual Occupation

18. In the event that the Respondent’s conduct with respect to the Trading Accounts described above did not constitute securities related business, the Respondent had and continued in another gainful occupation that was not disclosed to and approved by the Members with which he was registered.

19. In addition, the Respondent had and continued in another gainful occupation that was not disclosed to and approved by the Members with which he was registered by recommending or assisting clients and other individuals to purchase physical precious metals such as gold and silver.

20. The Respondent’s conduct was contrary to MFDA Rules 1.2.1(d)^[2] and 2.1.1.

Leveraged Investment Recommendations to Client AS

21. Between about June 2007 and November 3, 2015, the Respondent recommended and facilitated the implementation of a leveraged investment strategy (the “Leveraged Investment Strategy”) in the accounts of client AS whereby the client was advised to obtain two investment loans and use the proceeds of the investment loans to purchase precious metal mutual funds for her account. The investment loans were arranged such that Client AS was only required to pay the monthly interest due on the loans but did not have to pay down any of the principal amount of the loans (“interest-only loans”).

22. The Leveraged Investment Strategy was based on the premise that the precious metal mutual funds recommended by the Respondent would generate sufficient investment growth to enable Client AS to pay off the investment loans.

23. During the course of recommending the Leveraged Investment Strategy to client AS, the Respondent made the following representations, among others:
    1. the precious metal mutual funds would not decrease in value and could be relied upon to grown in value over time;
    2. the precious metal mutual funds would continue to grow in value over time; and
    3. the Leveraged Investment Strategy was low risk.

24. The Respondent did not discuss with client AS how she could or would repay the principal amount of her interest-only investment loans.

25. Client AS relied on the Respondent’s recommendations to open a leveraged account at W.H. Stuart and applied for and obtained two loans totaling $60,000 from AGF Trust, as set out below:

Date of Loan	Loan Amount
June 21, 2007	$50,000
July 27, 2007	$10,000

The terms of the loan did not require client AS to repay any of the principal amount borrowed as long as she paid the interest as it came due.

26. Relying upon the Respondent’s recommendations, client AS used the proceeds of her investment loans to purchase the AGF Precious Metals Fund.

27. Between June 2008 and November 2015, the value of the AGF Precious Metals Fund consistently declined in value. As a result of the decline in value of the AGF Precious Metals Fund, the total value of client AS’s investments declined below the outstanding principal amount of her investment loans. As a consequence, client AS was not in position to sell her mutual funds and use the sale proceeds to pay down her investment loans without incurring a shortfall for which she would be responsible.

28. On December 2, 2015, following the Respondent’s resignation from Keybase, client AS filed a complaint with the Member with respect to the suitability of the Leveraged Investment Strategy. Keybase conducted a review and investigation of her complaint and provided compensation to client AS.

Allegation #3 – Inaccurate KYC Information

29. The Respondent completed the documents required to implement the Leveraged Investment Strategy in the account of client AS, including the New Account Application Forms (“NAAFs”) and the AGF Trust investment loan applications, without discussing the contents of the documents with client AS. The Respondent then had client AS sign the fully-completed documents without discussing the content of the documents or otherwise confirming the accuracy of the content with the client.  As a consequence, client AS’s documented Know-Your-Client (“KYC”) information did not accurately reflect the clients’ actual personal and financial circumstances.

30. The Respondent completed the clients’ documents so that the information recorded on the documents complied or substantially complied with W.H. Stuart’s minimum requirements permitting the use of leveraging. H. Stuart’s policies and procedures stated that leveraging was only suitable for those clients that met the following criteria, among other factors:
    1. an investment knowledge of “good” or “excellent”;
    2. a “long term” time horizon;
    3. a “medium” or “high” risk tolerance;
    4. the clients “must be able to afford to service their debt load using their own demonstrated personal income”; and
    5. the borrowed monies did not exceed 40 percent of clients’ net worth.

31. When the Leveraged Investment Strategy was implemented by the Respondent in client AS’s account, client AS was recently divorced. Her annual income was approximately $32,000 and she lived in a home that was jointly owned with her ex-husband.

32. The Respondent recorded the investment knowledge of client AS as “extensive” when he knew or ought to have known that the clients’ actual investment knowledge was limited to nil. The Respondent further recorded client AS’s investment experience as “extensive” even though he knew that, although client AS had made prior investments in mutual funds and equity securities, such experience was obtained by client AS investing in joint accounts held with her ex-husband, which accounts were serviced by the Respondent and for which the Respondent obtained instructions exclusively from client AS’s ex-husband.

33. The Respondent recorded client AS’s investment risk tolerance “aggressive” when he knew or ought to have known that her actual investment risk tolerance was “low”.

34. By engaging in the conduct described above, the Respondent failed to observe high standards of ethics and conduct in the transaction of business and engaged in conduct unbecoming an Approved Person, contrary to MFDA Rule 2.1.1

Allegation #4 – The Respondent Failed to Explain the Leveraged Investment Strategy

35. At all material times, client AS relied entirely or substantially on the Respondent’s recommendations with respect to the Leveraged Investment Strategy and his explanations, to the extent he provided any, of the risks, benefits, material assumptions, features and costs of the Leveraged Investment Strategy.

36. The Respondent did not take any, or sufficient, steps to ensure that he understood or adequately informed himself of:
    1. the risks inherent in using borrowed monies to invest; and
    2. the operation and features of AGF Precious Metals Fund and, in particular, the risks such an investment posed to investors when used as part of the Leveraged Investment Strategy.

37. As a consequence, the Respondent misrepresented, failed to fully and adequately explain, or omitted to explain, the risks, benefits, material assumptions, features and costs of the Leveraged Investment Strategy to client AS, as more particularly described below.

(a) Decline in value of the ROC mutual funds

38. The Respondent misrepresented, failed to fully and adequately explain, or omitted to explain the risk that the AGF Precious Metals Fund might decline in value over time. In fact, the Respondent led the clients to believe that investment would, during the course of the Leveraged Investment Strategy, only maintain its value or increase in value over time.

39. The Respondent misrepresented, failed to fully and adequately explain, or omitted to explain the risk that the value of units held in the AGF Precious Metals Fund would drop and that client AS would not be able to rely on the proceeds generated from the sale of the investments to repay the entire principal amount of her interest-only investment loans.

(b) Effect of increase in borrowing costs

40. The Respondent misrepresented, failed to fully and adequately explain, or omitted to explain the risk that:
    1. an increase in interest rates could affect the sustainability of the Leveraged Investment Strategy if the client did not have sufficient sources of income, savings or credit to cover any shortfalls between the amount client AS was required to pay to service her investment loans; and
    2. client AS would sustain investment losses if the costs of servicing her investment loans exceeded the total returns generated by the AGF Precious Metals Fund.

(c) Effect of DSC fees

41. The Respondent misrepresented, failed to fully and adequately explain, or omitted to explain the risk that in the event client AS decided or was required to sell her AGF Precious Metals Fund prior to the expiry of the DSC schedules, then DSC fees would be payable that would further reduce the amount that the client would receive as proceeds from the sale of the investments.

(d) Leverage Disclosure Documents

42. Although the Respondent obtained Leverage Disclosure Documents signed by client AS prior to implementing Leveraged Investment Strategy in her account, he failed to adequately review and explain the contents of the Leverage Disclosure Documents to the client to ensure that she fully understood the risks of using borrowed monies to invest and had the financial means to withstand a downturn in the performance of her investment portfolio.

43. In summary, by engaging in the conduct described above, the Respondent misrepresented, failed to fully and adequately explain, or omitted to explain the risks, benefits, material assumptions, features and costs of the Leveraged Investment Strategy to client AS, thereby failing to ensure that the Leverage Investment Strategy was suitable for client AS and in keeping with client AS’s investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #5 – Unsuitable Leveraging Recommendations

44. The Leveraged Investment Strategy recommended and implemented by the Respondent in the account of client AS was not suitable for her and in keeping with her investment objectives, in that, among other reasons:
    1. client AS’s investment knowledge was limited to nil;
    2. clients AS’s investment risk tolerance was low; and
    3. client AS did not have sufficient financial resources to withstand investment losses if the Leverage Investment Strategy did not perform as the Respondent represented it would, and
    4. although at the time she obtained the AGF investment loans client AS’s loan to net worth ratios was 27%, client AS’s net worth was calculated based upon the total value of assets that were jointly owned with her ex-husband, from whom she had recently divorced and not on the value of client AS’s entitlement to only her share of the value of those assets.

45. By engaging in the conduct described above, the Respondent failed to ensure that the leveraged investment recommendations he made to client AS were suitable for the client AS and in keeping with her investment objectives, having regard to:
    1. the client’s relevant “Know Your Client” information and financial circumstances, including but not limited to the clients’ ability to afford the costs associated with the investment loans and withstand investment losses; and
    2. the Member’s requirements regarding the use of leveraging, as set out in the Member’s policies and procedures;

    contrary to MFDA Rules 2.2.1 and 2.1.1 and the policies and procedures of the Member.

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: Francis Roy
Fax: (416) 361-9073
Email: froy@mfda.ca

A Reply shall be filed by:

1. providing four (4) copies of the Reply to the Office of the Corporate Secretary by personal delivery, mail or courier to:
   1. The 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) electronic copy of the Reply to the Office of 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.

[2] See note 1 above.