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Reasons For Decision

Re:

Reasons For Decision

Reasons for Decision
File No. 201352



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: Dennis Villarin


Heard: April 23, 2014 in Winnipeg, Manitoba
Reasons for Decision: July 9, 2014

REASONS FOR DECISION

Hearing Panel of the Prairie Regional Council:

Robert Hucal
Chair

Patricia Kloepfer
Industry Representative

Greg Wiebe
Industry Representative

Appearances:

Charles Toth
)
Senior Enforcement Counsel, Mutual Fund

)
Dealers Association of Canada
)

Dennis Villarin
)
Not present nor represented by Counsel
)

)

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Introduction

1.
By Notice of Hearing dated November 25, 2013, the Mutual Fund Dealers Association of
Canada (“MFDA”) commenced disciplinary proceedings and we were constituted as a Hearing
Panel, in the matter of Dennis Villarin (“Respondent”) pursuant to Sections 20 and 24 of MFDA
By-Law No. 1.

2.
The Notice alleged that the Respondent had engaged in conduct contrary to the By-Law,
Rules and Policies of MFDA:

Allegation #1: Between March 2006 and February 2008, the Respondent prepared and
submitted new client account forms and loan applications for 14 clients which the
Respondent knew or ought to have known contained, false, incorrect or misleading
information, thereby failing to observe high standards of ethics and conduct in the
transaction of business and engaging in conduct unbecoming an Approved Person,
contrary to MFDA Rule 2.1.1.

Allegation #2: Between March 2006 and February 2008, the Respondent misrepresented,
failed to fully and adequately explain, or omitted to explain the risks, benefits, material
assumptions, features and costs of a leveraged investment strategy that he recommended
and implemented in the accounts of 14 clients, thereby failing to ensure that the leveraged
investment strategy was suitable for the clients and in keeping with the clients’
investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1.

Allegation #3: Between March 2006 and February 2008, the Respondent failed to ensure
that the leveraged investment strategy that he recommended and implemented in the
accounts of 14 clients was suitable for the clients and in keeping with their investment
objectives, having regard to the clients’ 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, contrary to
MFDA Rules 2.2.1 and 2.1.1.
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Allegation #4: Commencing in June 2012, the Respondent failed to attend for an
interview during the course of an investigation of his conduct by the MFDA, contrary to
s. 22.1 of MFDA By-Law No. 1.

3.
The First appearance was held on November 25, 2013, when no-one appeared on behalf
of the Respondent.

4.
Initially the Respondent responded to information requests by MFDA, but ceased
connection once he was informed he was the subject of an investigation into his sales practices
while registered as a mutual fund salesman with WFG Securities of Canada Inc. (“WFG”).

5.
The Respondent has not contacted the MFDA since January 31, 2012 when he became
aware of the investigation. The Respondent advised that materials could be sent to him at his
parents’ address. No alternative address was provided.

6.
Service of the Notice of Hearing was attempted at his parents’ Winnipeg address, without
success.

7.
The Notice of Hearing and the date of Hearing is posted on the MFDA website accessible
by the public. Prior to the Hearing, MFDA attempted to contact the Respondent first by mail at
his last known address, then by leaving contact information with his apparent current employer,
then by his last known e-mail address and voicemail to his last known telephone number and
lastly, through his Facebook account. No response was received.

8.
The Panel has determined that steps taken by Staff to serve the Respondent, described
above, constitute good and sufficient service having regard to the requirements of MFDA Rule
of Procedure 4.2(1)(a).
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Registration History

9.
The Respondent was registered in Manitoba as a mutual fund salesperson with PFSL
Investments Ltd. from February 2004 to September 2005. Subsequently, in October 2005 to
August 2009, the Respondent was registered with WFG. All events described occurred while the
Respondent was registered with WFG and conducted business through the Winnipeg branch of
WFG. The Respondent is not currently registered in the securities industry in any capacity.

Discussion

10.
The events at issue in this proceeding came to the attention of the MFDA as a result of
complaints from 14 clients who were serviced by the Respondent. The complaints allege that the
Respondent engaged in conduct as follows:

11.
Recommended and facilitated implementation of a leveraged investment strategy in their
WFG accounts where the clients used borrowed monies to purchase return of capital (“ROC”)
mutual funds. The strategy was based on the premise that the mutual funds would generate
sufficient monthly payments to pay the costs associated with the loans. The clients borrowed a
combined total of $1,525,000 for the purpose of investing, based on the Respondent’s
recommendation. None of the clients had previously borrowed money to invest.

Allegation #1 – False and Misleading Loan Applications and New Account Forms

12.
In the course of implementing the investment strategy, the Respondent prepared and
submitted new account forms and loan applications for 7 of 14 clients which: a) inflated market
values of properties; b) reported assets which did not exist; c) reported investments which were
not owned by the clients; d) failed to report material liabilities; and e) reported income which
was not being received.

13.
The Respondent’s conduct increased the likelihood that the lender would approve the
loans and made it appear that the clients satisfied WFG’s requirements. This behaviour was in
the context of WFG’s requirement that the Respondent assess and determine the suitability of the
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investment recommendations.

14.
The policies established by WFG required that the Respondent carefully assess and
determine whether or not the leveraged investment recommendations were suitable for the client
considering certain parameters, including the requirement that the client have a good investment
knowledge, a high risk tolerance, a long-term investment outlook, no margin loans, any
borrowed amount not exceed 50% of the client’s net worth; and the ability to service the debt
using personal income.

Allegation #2 – Failure to Explain Leveraged Investment Strategy

15.
The Respondent, in recommending and facilitating implementation of a leveraged
investment strategy on the accounts of 14 clients, made one or more of the following
representations:

a) that the investment would not require any out-of-pocket expenses to cover loans;
b) that generated monthly proceeds would pay loan costs;
c) that no money would be lost;
d) that value of the investments would not decline;
e) that monies would double in value to service loans;
f) that the mutual funds would pay 12% – 13% annually, guaranteed for 7 years;
g) that the leveraged investment strategy was low risk.

16.
In making the recommendation, Villarin failed to explain that the investment strategy had
associated material risks; that payments by the ROC mutual funds could be reduced, suspended
or cancelled; that the investors might be forced to incur out-of-pocket expenses; that other
sources of income might be required to pay investment loans; and that increased interest rates
might affect projections concerning proceeds anticipated.

17.
In fact, all of the possible unexplained events aforesaid did occur and the investors
suffered losses in varying amounts.
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Allegation #3 – Unsuitable Leveraging Recommendation

18.
It was determined that none of the clients could afford to pay the costs associated with the
strategy, namely the costs of servicing the loans or to withstand the losses arising from the
strategy.

19.
The investors suffered losses of $400,000, excluding distributions. The Respondent sent
a letter to his clients on August 11, 2010 admitting, among other matters, his error in “giving
these types of transactions to all of you”. At the same time he deflected responsibility to WFG,
as they “were aware of what was being done to clients” in selling the leveraged investment
strategy.

20.
Similarly, in his January 13, 2012 correspondence with the MFDA, the Respondent
clearly identified WFG as being responsible for developing the strategy, for providing no
guidelines and training which only “told us how easy it was to get loans for clients” and
emphasized only positive aspects of the strategy.

21.
Three respondents in other MFDA proceedings, where we have rendered decisions,
namely A. Sobrevilla, C. Sulkers and D. Gragasin, admitted recommending and facilitating
implementation of the leverage investment strategy in an improper manner and which was
unsuitable for clients. Those respondents each stated they were trained by the Respondent
Villarin to recommend and implement the strategy.

Allegation #4 – Failure to Cooperate

22.
On December 12, 2012, MFDA Staff notified the Respondent by letter that his
recommendation relating to leverage investments for his WFG clients was being reviewed and
requested a written response. No response resulted from that date forward and confirmed
attempts to communicate by letter, email, voicemail and personal services failed. The
Respondent has not responded to MFDA since the initial letter request.

Page 6 of 9

23.
MFDA Rules provided for service of Notice of Hearing and Staff made reasonable efforts
to serve the Respondent, including service to a family member.

24.
The effect of the Respondent’s failure to reply does not preclude the Hearing Panel from
proceeding.

Misconduct

25.
The Respondent, in preparing incorrect loan applications and New Client Account forms,
engaged in conduct and practice detrimental to the public interest and failed to deal honestly and
in good faith with his clients.

26.
The Respondent failed to fulfill the suitability obligations by ignoring the “Know-Your-
Client” rules in failing to learn about the clients, their personal financial situations, financial
situation, investment experience and objectives and their risk tolerance. Failure to comply is a
serious matter.

27.
The Respondent also failed to explain the investment strategy proposed and again totally
ignored the obligation to disclose material relevant information regarding the investment,
including the negative aspects of the transaction. There was admittedly no balanced presentation
or information afforded.

28.
The evidence provided by Sobrevilla, Sulkers and Gragasin is that the Respondent was a
key figure at WFG in promoting the use of the leverage investment strategy to other mutual fund
salespersons to generate business. The evidence showed that each of the aforementioned
salespersons exhibited the same serious breaches in their sales practices with similar serious
effects on their clients.

Penalty

29.
The proposed penalty, which as a Panel we confirm and support is:

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a) a permanent prohibition on the Respondent’s authority to conduct securities related
business while in the employ of or associated with any MFDA member;
b) a fine of $250,000; and
c) costs of $10,000.

30.
We have considered the facts in determining our penalty decision and find that:

a) The allegations proved are serious. In particular, the false information provided and
failure to comply with “Know-Your-Client” suitability obligations are serious
breaches of the Respondent’s obligation;
b) The harm suffered to investors was extensive. The Respondent’s activities resulted in
losses to his clients of at least $400,000 and more than $1,500,000 of investment
monies exposed;
c) The risk to investors and capital markets exists if the Respondent were to continue in
business. The Respondent’s conduct not only affected his clients but extended to
other Approved Persons who were improperly instructed or trained, causing harm to
their clients;
d) The damage caused to the integrity of the markets, although not immediately defined,
has occurred by reason of the Respondent’s actions;
e) The need to alert and deter is, we believe, reflected at least in the permanent
prohibition;
f) The Respondent did not respond to the disciplinary proceeding, so he is either
unwilling to or does not recognize the seriousness of his misconduct; and
g) The proper penalties are consistent with previous decisions made in similar
circumstances.

31.
Having regard to the foregoing, we are of the opinion that the penalties are reasonable
and proportionate having regard to the conduct of the Respondent and the circumstances of this
case.
Page 8 of 9

DATED this 9th day of July, 2014.

“Robert Hucal”

Robert Hucal
Chair

“Patricia Kloepfer”

Patricia Kloepfer
Industry Representative

“Greg Wiebe”

Greg Wiebe
Industry Representative
DM 379760 v2

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