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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: Derek Chapman

NOTICE OF HEARING

NOTICEis hereby given that a first appearance will take place by teleconference before a hearing panel of the Central Regional Council (“Hearing Panel”) of the Mutual Fund Dealers Association of Canada (“MFDA”) in the hearing room at the MFDA offices, 121 King Street West, Suite 1000, Toronto, Ontario on June 11, 2019 at 9:00 a.m. (Eastern), or as soon thereafter as the hearing can be held, concerning a disciplinary proceeding commenced by the MFDA against Derek Chapman (“Respondent”).

  • Paige Ward
    Paige Ward
    Corporate Secretary

    Mutual Fund Dealers Association of Canada
    121 King St. West, Suite 1000
    Toronto, ON M5H 3T9
    Telephone: 416-945-5134
    Fax: 416-361-9781
    E-mail: [email protected]

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

Allegation #1: Between December 2014 and October 5, 2016, the Respondent engaged in personal financial dealing with a client by borrowing $600,000 from the client, thereby giving rise to an actual or potential conflict of interest, which the Respondent failed to address by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to the Member’s policies and procedures and MFDA Rules 2.1.4, 2.1.1, 2.5.1, and 1.1.2.

Allegation #2: Beginning on or around February 13, 2018, the Respondent failed to cooperate with an investigation into his conduct by MFDA Staff, contrary to section 22.1 of MFDA By-law No. 1 and MFDA Rule 2.1.1.

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 as a mutual fund salesperson (now known as a dealing representative) in Ontario from August 2, 2002 to November 1, 2016, and in Alberta from July 25, 2007 to November 1, 2016, with Quadrus Investment Services Ltd. (the “Member”), a Member of the MFDA.
  2. On November 1, 2016, the Member terminated the Respondent’s registration as a result of the events that are the subject of this proceeding.
  3. At all material times, the Respondent carried on business in the St. Catharines, Ontario area.
  4. The Respondent is not currently registered in the securities industry in any capacity.

The Respondent Borrows $600,000 from a Client

  1. At all materials times, the Member’s policies and procedures prohibited its Approved Persons from borrowing monies from clients.
  2. In 2009, the Respondent became the Approved Person responsible for servicing the investment accounts of client LM. The Respondent also acted as client LM’s life insurance agent.
  3. In or around October 2014, the Respondent requested a $600,000 loan from client LM. The Respondent advised client LM that the purpose of the loan was to purchase investment properties to resell at higher prices in the Turks and Caicos Islands (“TCI”).
  4. Client LM agreed to loan the Respondent $600,000 as the Respondent requested. Client LM borrowed the money from his own whole life insurance policy (which the Respondent had sold to client LM) and advanced the proceeds to the Respondent.  Client LM was required to pay interest on the monies borrowed from his insurance policy at a rate of 6% per year.  The Respondent agreed to pay interest to client LM at a rate of 12% per year.
  5. On December 30, 2014, the Respondent signed a promissory note acknowledging that he had borrowed $600,000 from client LM and would pay client LM an annual interest rate of 12%. The principal of the loan was due to be repaid on August 15, 2015.  The Respondent did not provide any collateral for the loan.
  6. The Respondent did not disclose to the Member that he borrowed monies from client LM or that he was involved in the purchase and resale of investment properties in TCI.
  7. The loan between the Respondent and client LM gave rise to a conflict of interest that the Respondent failed to disclose to the Member or address by the exercise of responsible business judgment influenced only by the best interests of the client.
  8. Contrary to the terms of the promissory note, the Respondent failed to make all of the interest payments that were due on the loan and failed to repay the principal amount borrowed by August 15, 2015.
  9. In March 2016, client LM surrendered the whole life insurance policy for its remaining cash value.
  10. On August 10, 2016, client LM sent a complaint letter to London Life Insurance Company (“London Life”), the company that had issued the whole life insurance policy to client LM, advising of the loan and that the Respondent’s default had caused client LM to surrender the policy.
  11. On August 26, 2016, client LM commenced a civil proceeding in the Ontario Superior Court of Justice against the Respondent and others seeking repayment of the promissory note with interest.
  12. On or around October 5, 2016, the Respondent repaid client LM the full amount that he had borrowed with interest.

The Respondent Refuses to Produce Documents and Answer Questions from MFDA Staff

  1. The Member and MFDA Staff (“Staff”) each commenced investigations into the Respondent’s conduct.
  2. Throughout the course of the Member’s and Staff’s investigations, the Respondent gave differing and contradictory answers concerning the $600,000 borrowed from client LM and how he used the monies.
  3. The Respondent gave the following information in response to inquiries about his conduct:
    1. On August 25, 2016, during a telephone interview by London Life and the Member, the Respondent advised that the purpose of the loan was to buy “estate sale” investment properties to resell in TCI. The Respondent further advised that he had used the borrowed funds to purchase such a property, but claimed that he had been unable to sell the property.
    2. In an email to the Member dated September 15, 2016, the Respondent advised that although he owned vacation property in TCI, he had never taken a loan from any individual to buy such property, and the property that he owned in TCI had been purchased through a corporation.
    3. In a letter from the Respondent’s lawyer to Staff dated November 22, 2016, the Respondent stated that the $600,000 had been borrowed and used to “pursue a real estate opportunity”.
    4. In a letter from the Respondent’s lawyer to Staff dated December 23, 2016, the Respondent stated that none of the proceeds of the loan from client LM had been used to purchase real estate in TCI, and that a corporation had been established to acquire vacation property in TCI.
    5. On December 6, 2017, during an interview with Staff, the Respondent stated that while he had bought-out two partners with whom he co-owned a condominium property in TCI, he had not used the money borrowed from client LM to finance the purchase of the condominium property or buy-out the interests of his partners in that property. Instead, the Respondent claimed that the $600,000 had been used to repay a shareholder loan and other personal expenses.
    6. On January 22, 2018, during a second interview with Staff, the Respondent stated that the shareholder loan that he had repaid using the proceeds of the loan from client LM, had financed the purchase of real estate in TCI. The Respondent also stated that neither he, nor any corporations that he owned, held property in the TCI.  The Respondent’s property interests in TCI were held in the names of the Respondent’s spouse or corporations that she controlled.
  4. Commencing February 13, 2018, as part of Staff’s investigation of the Respondent’s conduct, Staff sent correspondence to the Respondent’s counsel requesting documents and seeking additional information in connection with the Respondent’s $600,000 loan from client LM and further information and corroboration concerning how the proceeds of that loan were used.
  5. The Respondent refused to provide additional documents or answer the questions communicated in that correspondence.
  6. By failing or refusing to produce documents or provide information requested by Staff in furtherance of its investigation of his conduct, the Respondent has undermined Staff’s ability to complete its investigation of his activities, including the extent of his real estate business activities in TCI.

Allegation #1 – Personal Financial Dealing

  1. By borrowing $600,000 from client LM as described above at paragraphs 5-16, the Respondent engaged in personal financial dealings with a client that gave rise to an actual or potential conflict of interest, which the Respondent failed to address by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to the Member’s policies and procedures and MFDA Rules 2.1.4, 2.1.1, 2.5.1, and 1.1.2.

Allegation #2 – Failure to Cooperate with MFDA Staff

  1. By failing or refusing to provide documents and answer the questions sent to the Respondent by Staff, as described above at paragraphs 18-22, the Respondent failed to cooperate with an investigation into his conduct by Staff, contrary to section 22.1 of MFDA
    By-law No. 1 and MFDA Rule 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:

  • 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: Alan Melamud
Email: [email protected]

A Reply shall be filed by:

  1. providing four 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 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.

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