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Bulletin #0166-E

Enforcement
MFDA imposes lifetime ban and $4.5 million fine on Earl Crackower

Mutual Fund Dealers Association of Canada
Association canadienne des courtiers de fonds mutuels
121 King Street West, Suite 1000, Toronto, Ontario, M5H 3T9
TEL: 416-361-6332 FAX: 416-943-1218 WEBSITE: www.mfda.ca

Contact: Hugh Corbett
BULLETIN #0166-E
Director of Litigation
September 30, 2005
Phone: 416-943-4685
Email: hcorbett@mfda.ca

MFDA Bulletin

Enforcement

For Distribution to Relevant Parties Within your Firm

MFDA imposes lifetime ban and $3.5 million fine on Earl Crackower

Nature of
A Hearing Panel of the Mutual Fund Dealers Association (“MFDA”) Ontario
Proceeding
Regional Council has imposed disciplinary penalties on Earl Crackower
(“Crackower”), a former Approved Person of the MFDA.

By-Laws,
Following a hearing on July 20, 2005, the Hearing Panel found that
Rules, Policies Crackower:
Violated


1. had, and continued in, another gainful occupation that was not
approved by the Member, contrary to MFDA Rule 1.2.1(d);
2. solicited and accepted monies from clients in the total amount
of $3.4 million, more or less, which he failed to return or
otherwise account for, contrary to MFDA Rule 2.1.1;
3. misled the MFDA by stating in response to an inquiry from the
MFDA that he had only borrowed or solicited monies from
one client when he knew that to be an incorrect response,
contrary to s. 22.2 of MFDA By-law No. 1 and MFDA Rule
2.1.1(b).
4. failed to attend at the offices of the MFDA and give
information for the purpose of allowing the MFDA to
investigate a complaint made against him, contrary to s.
22.1(c) of MFDA By-Law No. 1.

MFDA Rule 1.2.1(d) states:

An Approved Person may have, and continue in, another gainful
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occupation, provided that:

(iii) Member approval. The Member for which the Approved Person
carries on business either as an employee or agent is aware and approves
of the Approved Person engaging in such other gainful occupation;

MFDA Rule 2.1.1 states:

Each Member and each Approved Person of a Member shall:

(a) deal fairly, honestly and in good faith with its clients;
(b) observe high standards of ethics and conduct in the transaction
of business;
(c) not engage in any business conduct or practice which is
unbecoming or detrimental to the public interest; and
(d) be of such character and business repute and have such
experience and training as is consistent with the standards
described in this Rule 2.1.1 or as may be prescribed by the
Corporation.

Section 22.2 of MFDA By-Law No. 1 states:

For the purpose of any examination or investigation pursuant to
this By-law, the Corporation shall be entitled to free access to, and
to make and retain copies of, all books of account, securities, cash,
documents, bank accounts, vouchers, correspondence and records
of every description of the Member or person concerned, and no
such Member or person shall withhold, destroy or conceal any
information, documents or thing reasonably required for the
purpose of such examination or investigation.

Section 22.1(c) of MFDA By-Law No. 1 states:

For the purpose of any examination or investigation pursuant to
this By-law, a Member, Approved Person of a Member or other
person under the jurisdiction of the Corporation pursuant to the
By-laws or the Rules may be required by the Corporation:

(b) to attend and give information respecting any such matters;

Penalty
The Hearing Panel imposed the following penalties on Crackower:

1. Permanent prohibition of the authority of Crackower to
conduct securities related business in any capacity;
2. A fine of $3.4 million for engaging in another gainful
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occupation and for soliciting and accepting $3.4 million from
his clients and failing to return or otherwise account for these
funds;
3. A fine of $50,000 for misleading the MFDA;
4. A fine of $50,000 for failing to attend and give information;
and
5. Costs of the investigation and hearing in the amount of
$7,500.00.

Summary of
From March 1993 to November 2003, Crackower was registered in Ontario as
Facts
a mutual fund salesperson for Worldsource Financial Management Inc.
("Worldsource").

Between January 1994 and October 2003, Crackower solicited and accepted
monies from certain of his mutual fund clients whom he led to believe would
be participating in non-mutual fund investment opportunities. The clients
were, for the most part, elderly individuals with limited investment
knowledge and low investment risk tolerance.

Crackower led these clients to believe that he would invest their monies by
either providing bridge financing to small businesses that were unable to
obtain loans from conventional lenders or by placing their monies in some
other form of non-mutual fund investment. Crackower led these clients to
believe that their investments would be secure and would yield a higher rate
of return than the clients would earn from the mutual funds or fixed income
investments in which they would otherwise invest.

Crackower provided each client with a promissory note as evidence of the
monies that had been given to Crackower to invest on the client's behalf. The
promissory note set out the terms on which the initial investments and the
returns thereon would be repaid to the client. There is no evidence that
Crackower ever used any of the monies given to him by the clients to provide
bridge financing to third parties or that he invested the monies in any other
type of investment.

In April 2004, Crackower filed an assignment in bankruptcy in which he
acknowledged that 33 of his mutual fund clients were unsecured creditors to
whom he owed, cumulatively, $3,390,475.00. Crackower has not returned or
otherwise accounted for any of these monies.

In October 2003, the MFDA commenced an investigation. Crackower
provided a false and misleading response to an MFDA request. Crackower
also failed to attend and give information when requested to do so by the
MFDA.

The Hearing Panel noted that Crackower’s private business deals, which he
had not disclosed to Worldsource, were not only to the extreme detriment of
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his clients, but also in conflict with the work for which he was employed. In
cases involving misappropriation of funds and borrowing money from clients,
the Hearing Panel noted that the fine should roughly equal the amounts
misappropriated or borrowed.

The Hearing Panel also found that the penalty for misleading an MFDA
investigation should be at least equal to the penalties imposed for failing to
cooperate with an MFDA investigation. Otherwise, it would imply that it is
better to lie during an investigation (which may misdirect the MFDA
investigators and result in unnecessary expense and delay) than to refuse to
cooperate.

For greater detail, see the Decision and Reasons, dated August 22, 2005 and
the Order, dated August 29, 2005, posted on the MFDA website under
“Enforcement”.


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