Skip to Main Content

MFDA Reasons For Decision

IN THE MATTER OF A SETTLEMENT HEARING PURSUANT TO SECTION 24.3 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: International Capital Management Inc., John Paul Sanchez and Javier Andreas Sanchez

Heard: December 16, 2016 in Toronto, Ontario
Reasons For Decision: February 2, 2017

Reasons For Decision

Hearing Panel of the Central Regional Council:

  • Mark J. Sandler, Chair
  • Linda J. Anderson, Industry Representative

Appearances:

Shelly Feld, Counsel for the Mutual Fund Dealers
|David R. Babin, Counsel for the Mutual Fund Dealers|Ellen Bessner, Counsel for the Respondent

Introduction

  1. On December 13, 2016, the Mutual Fund Dealers Association of Canada (the “MFDA”) gave notice that it was applying for an order placing restrictions on the business activities of the Respondents and for related relief, pursuant to s. 24.3 of By-law No. 1 of the MFDA.
  1. On December 16, 2016, we heard the application. Subject to some refinements, the Respondents, International Capital Management Inc. (“ICM”), John Paul Sanchez and Javier Andreas Sanchez did not oppose the application. Indeed, the Respondents’ counsel and Staff worked cooperatively to structure the terms of the order we were asked to make.
  1. In support of the application, Staff relied upon the affidavit of Matthew Brady, Managing Director of Compliance at MFDA, and the affidavit of Lara Rowles, Manager in the Investigations Group of MFDA’s Enforcement Department. Their affidavits incorporated as exhibits the documents which Staff relied upon.
  1. After hearing the submissions of counsel, we ordered the following:
    1. Pursuant to s. 24.3.3(b) of MFDA By-law No. 1, commencing on Friday, December 16, 2016, ICM and its Approved Persons (including the Respondents John Sanchez and Javier Sanchez) shall cease to engage in any form of member business including but not limited to any securities related business[1] other than advising and trading with respect to prospectus qualified mutual funds and Guaranteed Investment Certificates guaranteed by the Canada Deposit Insurance Corporation (“GICs”), and in particular, they shall not directly or indirectly sell or facilitate investments in or loans to:
      1. ICM;
      2. Invoice Payment Systems Corporation (“IPS”) or any affiliated entity;
      3. Energentium Inc. (“Energentium”) or any affiliated entity;
      4. any entity that is related to or affiliated with ICM, IPS or Energentium;
      5. any Approved Person or former Approved Person of ICM (including John Sanchez and Javier Sanchez), German Suarez, Mark Sanchez, Maria Conchita Sanchez or Maria Sanchez-Keane (the “Principals”);
      6. a spouse or former spouse, parent, child, grandchild, sibling, niece or nephew of any of the Principals (“Related Individuals”);
      7. any entity or individual that any one of the Principals:
        1. has ever loaned money to or invested money with;
        2. has ever held 20% or more of the shares of;
        3. has ever served as officer or director of;
        4. has ever held power of attorney for; or has ever had full or partial financial control of (including bank account signing authority)

(collectively 1 (a)-(g) are the “Financially Related Entities”)

2. Pursuant to s. 24.3.3(b) of MFDA By-law No. 1, commencing on Friday, December 16, 2016, ICM shall not approve or otherwise authorize any Approved Persons of ICM (including the Respondents John Sanchez and Javier Sanchez) to engage in any outside business activities (i.e.; any business activities that are not carried on for the account of ICM) or referral arrangements except with respect to insurance products sold pursuant to a valid insurance license without the prior authorization of Staff and in particular, ICM shall not approve or otherwise authorize any Approved Persons of ICM to solicit, sell or otherwise facilitate investments in or loans to any Financially Related Entities or otherwise permit Approved Persons to facilitate investments other than prospectus qualified investments;

3. Pursuant to s. 24.3.3(b) of MFDA By-law No. 1, commencing on Friday, December 16, 2016, John Sanchez and Javier Sanchez are prohibited from engaging in any outside business activities or referral arrangements except with respect to insurance products sold pursuant to a valid insurance license and in particular, John Sanchez and Javier Sanchez are prohibited from soliciting, selling, referring, or otherwise facilitating investments in or loans to any Financially Related Entities or otherwise facilitating investments that are not prospectus qualified investments;

4. Pursuant to s. 24.3.3(b) of MFDA By-law No. 1, ICM and its Approved Persons (including the Respondents John Sanchez and Javier Sanchez) shall not enter into any personal financial dealings with any client of ICM or any individual who ceased to be a client of ICM within the past 5 years

5. Pursuant to s. 24.3.3(b) of MFDA By-law No. 1, commencing on Friday, December 16, 2016, ICM and its Approved Persons (including the Respondents John Sanchez and Javier Sanchez) shall cease to engage in any form of advising or trading with respect to investments presently held or future investments in the Caldwell ICM Market Strategy Trust Fund;

Trust Accounts

6. Within 5 business days, ICM shall cease to operate a trust account and shall only be eligible to operate as a Level 2 dealer unless otherwise ordered by a Hearing Panel of the MFDA.

Notification To FundSERV

7. Pursuant to s. 24.3.3(b) of MFDA By-law No. 1, within 5 business days of the date of this order, John Sanchez, the Ultimate Designated Person of ICM shall send a letter to FundSERV, copied to counsel for Staff, informing FundSERV that ICM is no longer authorized to operate a trust account and cannot accept client funds including redemption proceeds and shall attach a copy of this order to the letter.

Reporting Requirements

8. Pursuant to s. 24.3.3(b) of MFDA By-law No. 1, the Respondents shall ensure that:

a) all client complaints (including complaints regarding investments in or loans to any of the Financially Related Entities); and

b) information concerning possible contraventions of legal or regulatory requirements referenced in section 6.1(b) of MFDA Policy No. 6;

are reported to Staff within 2 business days and are otherwise dealt with in accordance with MFDA Rule 2.11 and MFDA Policy Nos. 3 and 6.

Notification To Clients Of ICM

9. Within 5 business days, ICM shall send a letter to all clients of ICM informing clients that pursuant to an Order of the MFDA:

a) ICM and its Approved Persons are restricted to advising or trading solely in prospectus qualified mutual funds and GICs; and

b) All cheques or other forms of payment for the purchase of mutual funds must be made payable to the issuer of the mutual funds and cannot be made payable to ICM and the proceeds of all redemptions will be paid by fund companies directly to clients.

10. The Respondents shall obtain the written approval of counsel for Staff with respect to the content of the letter to be sent to clients before sending the letter and shall notify counsel for Staff when the letter has been sent to all clients of ICM and shall provide counsel for Staff with a sample of the letter that was sent.

Production Of Information And Records To Staff

11. Pursuant to s. 24.3.3(b) of MFDA By-law No. 1, within 3 business days, the Respondents shall provide Staff with a list of all bank and investment accounts (including bank accounts and investment accounts that have been closed) presently or previously owned or controlled in whole or in part by:

a) ICM;

b) John Sanchez; and/or

c) Javier Sanchez;

including any bank account or investment account:

i. in respect of which John Sanchez and/or Javier Sanchez presently has signing authority (including co-signing authority);

ii. in respect of which John Sanchez and/or Javier Sanchez previously had signing authority at any time since ICM became a Member of the MFDA;

iii. of a Financially Related entity.

12. Pursuant to ss. 24.3.3(b), the Respondents (including all Approved Persons of ICM) shall provide information and access to documentation and other records including electronic records that are requested by Staff and copies or print outs of any records that Staff requests in order to facilitate Staff’s investigation and ensure compliance with any order issued by the Hearing Panel and/or with MFDA By-laws, Rules and Policies, including but not limited to:

a. records including documentation and correspondence associated with all member business (including but not limited to securities-related business) that was facilitated by Approved Persons of ICM but was not carried on for the account of ICM, processed through the facilities of ICM and/or recorded on the books and records of ICM;

b. financial records including financial statements and banking records (including bank statements, transaction summaries, deposit books and cancelled cheques) of any bank account that John Sanchez or Javier Sanchez or ICM has power, possession, control or signing authority for including without limitation, if applicable, the bank account records of Energentium, IPS, 136155 Ontario Inc., 1634792 Ontario Inc., 1876692 Ontario Inc., 2029984 Ontario Ltd. and 2029986 Ontario Ltd.;

c. information and documentation concerning the interests, shareholdings, loans, roles, responsibilities, relationship or other association between the Respondents, Approved Persons of ICM or clients or former clients of ICM with any of the Financially Related Entities;

d. information, records and files associated with client accounts and transactions that were processed for clients (including without limitation, new account application forms, know-your-client records, trade processing records, trade orders, records of investments made by clients including promissory notes issued, records of client instructions received including notes of Approved Persons and correspondence exchanged with clients, asset or account transfer documents, limited trading authorizations, powers of attorney on file for clients, financial information including tax records provided by clients to ICM or any of its present or former Approved Persons, disclosure forms and documents that were provided to or signed by present or former clients of ICM, client statements, portfolio summaries, reports, recommendations and analysis prepared in respect of accounts or investments held by clients or recommendations made to clients by present or former Approved Persons of ICM and access to any records including electronic records associated with transactions processed for clients or former clients of ICM including those associated with any back office system that ICM presently uses or used in the past);

e. appraisals of ICM and any assets that ICM has a financial interest in; and

f. appraisals of IPS and Energentium and any assets that those entities own or control.

Privilege Protocol

13. Immediately (and not later than 5 p.m. on Monday, December 19, 2016), the Respondents shall provide a list of any hard copy documents that were obtained by Staff during an attendance at the office of ICM on November 15, 2016 (the “Hard Copy Documents”) over which the Respondents assert a claim of privilege and the basis for that claim of privilege.

14. As soon as the list of Hard Copy Documents over which privilege claims are being asserted has been delivered or after 5 p.m. on December 19, 2016 if no list has been delivered, Staff is authorized to review any of the Hard Copy Documents that are not subject to a claim of privilege by the Respondents.

15. The Respondents shall comply with the terms of the privilege protocol set out in a letter from counsel for Staff dated November 24, 2016 including without limitation in respect of electronic records of ICM that were imaged by Digital Evidence International Inc. Subject to any agreement confirmed in writing by counsel for Staff, upon the expiry of the timelines set out in the privilege protocol, Staff is authorized to access and review electronic documents in respect of which no claim of privilege has been asserted by the Respondents.

Required Filings

16. Pursuant to s. 24.3.3(b) of MFDA By-law No. 1, ICM shall continue to prepare, deliver and file on a timely basis, all documents required to be filed pursuant to MFDA requirements and Ontario securities law, including without limitation all applicable registration filings, monthly and annual reports to the MFDA, and account statements where applicable.

17. If at any time a non-party to this proceeding, with the exception of the bodies set out in section 23 of MFDA By-law No. 1, requests production of or access to exhibits in this proceeding that contain personal information as defined by the MFDA Privacy Policy, then the MFDA Corporate Secretary shall not provide copies of or access to the requested exhibits to the non-party without first redacting from them any and all personal information, pursuant to Rules 1.8(2) and (5) of the MFDA Rules of Procedure.

18. The next appearance in this proceeding is scheduled to take place on January 24, 2017 commencing at 11:00 a.m. (Eastern).

  1. Our written reasons for making this order follow.

Analysis

  1. Section 24.3.1 of By-law No. 1 permits a Hearing Panel, upon application by the MFDA, to impose any penalty provided for in section 24.3.3 upon an Approved Person if certain events have occurred, including (v) the person has failed to comply with the provisions of any By-law, Rule or Policy of the MFDA. Similarly, section 24.3.2 permits a Hearing Panel, upon application by the MFDA, to impose any penalty provided for in section 24.3.3 upon a Member if certain events have occurred, including (x) the Member has failed to carry out any written agreement with the MFDA to take action to comply with any By-law, Rule or Policy of the MFDA and (xi) the Member has failed to comply with the provisions of any such By-law, Rule or Policy.
  1. The evidence relied upon by Staff to support the proposed Order is briefly summarized below.
  1. ICM became a Member of the MFDA on February 8, 2002. It is registered in Ontario as a mutual fund dealer.
  1. John Paul Sanchez “John”) has been an Approved Person, and an officer and director of the dealer since it became a Member of the MFDA. He has also been registered in Ontario as the Ultimate Designated Person (“UDP”) and Chief Compliance Officer (“CCO”) of ICM since December 18, 2009.
  1. Javier Andrea Sanchez (“Javier”) has been an Approved Person, and an officer and director of ICM since it became a Member of the MFDA.
  1. Staff first discovered that the Respondents were participating in the solicitation of money for investment in IPS in 2004 during the first MFDA sales compliance examination of ICM. At that time, IPS Notes were being sold as an exempt offering, processed though the facilities of ICM. Compliance staff raised several concerns about the manner in which the IPS Notes were being sold for the account of ICM and processed on its books and records.  Those concerns included whether the IPS Notes were being sold pursuant to applicable exemptions from prospectus requirements; whether the conflicts of interest arising from the non-arm’s length relationship between the Respondents and the issuer were being adequately addressed, and whether the IPS Notes were suitable investments for many of the clients to whom they were offered.
  1. The deficiencies identified by compliance staff were referred to the Enforcement Department for further investigation. Following that referral, in October 2006, ICM entered into an Agreement and Undertaking with Staff which was intended to address the deficiencies and concerns that had come to light during the 2004 sales compliance examination.
  1. After 2006, the Respondents never reported any association or involvement with IPS during compliance examination interviews and never reported the sale of the IPS Notes in their responses to MFDA annual product surveys and questionnaires. Instead of implementing the revised procedures for the sale of IPS Notes that Staff and the Respondents had agreed upon, the Respondents ceased to process sales of the IPS Notes (and other non-prospectus qualified mutual fund products) for the account of ICM. We can reasonably infer from the evidence available to us that since 2006, the Respondents have deliberately concealed their activities in connection with IPS and Energentium from Staff.
  1. In early April 2011, the Ontario Securities Commission (“OSC”) referred an anonymous complaint to Staff alleging that John and Javier were engaged in undisclosed outside business activities regarding the sale of IPS Notes. As a result of that referral, on April 6, 2011, Staff sent a letter to the Respondents, asking them to reply to Staff about their involvement in the sale of IPS Notes to clients of ICM. The letter specifically stated, among other things, that the information obtained by Staff raised the possibility that the Respondents may have been engaged in outside business activities with respect to IPS, among other entities. The letter also asked for responses to the following questions:
    1. Your position at/relationship to IPS;
    2. When the activity started;
    3. The nature of business of IPS;
    4. Did you refer any dealer and/or non-dealer clients to IPS? If so, provide the names of all dealer and non-dealer clients, including dates and amounts of any transactions facilitated and/or investments made for these individuals;
    5. Any and all amounts of commissions and referral fees you received in relation to any association with IPS; and
    6. A copy of any documents signed by you regarding the disclosure and approval of any outside business activity involving IPS to ICM.
  1. On May 11, 2011, the Respondents replied by email. The Respondents provided the following answers, among others:
    1. The Respondents have never held any positions at IPS;
    2. ICM had a referral arrangement with IPS that ran from 2003 to 2004, and there was no longer an existing relationship with IPS;
    3. A referral fee of 2% was paid on each transaction where ICM clients were referred to IPS, and these fees were paid over a twelve month period; and
    4. The Respondents had sent clients who purchased IPS Notes a letter, which indicated that a potential conflict of interest may exist between ICM and IPS because the two are related companies.
  1. Staff had no evidence or information that was inconsistent with these representations. Staff closed the file.
  1. In early November 2016, TV, a close friend of client MW, a 92 year old woman, contacted Staff out of concern for MW’s financial well-being. TV was aware that MW had maintained an investment in an IPS Note for several years, and held an investment in an Energentium Note. TV was concerned because she was unfamiliar with those companies, the products appeared to be high risk, and a significant portion of MWs portfolio (close to one third) was tied up in the two investments.
  1. On November 9, 2016, Staff received four documents from TV by mail. The first document was a copy of client MW’s ICM portfolio summary as of June 30, 2014. Under the heading “Fixed Income”, the portfolio summary listed three IPS Notes, and one Energentium Note. Each of the four notes was described as having an interest rate of zero percent. As of June 30, 2014, client MW held a combined total of $239,677.67 worth of IPS and Energentium Notes.
  1. TV’s report raised significant concerns for Staff. First, the records appeared to indicate that MW had purchased investments through the Respondents which had not been recorded on the books and records of ICM.  Second, the Notes had not been reported on annual product surveys. The Respondents had previously informed Staff that their relationship with IPS had ceased.  Third, Staff was concerned about the suitability of the Notes for an elderly client like MW.

On-Site Inspection of ICM

  1. On November 15, 2016, Staff attended the offices of ICM at 9:15 am to conduct an unannounced on-site inspection. Staff was not granted permission to begin imaging the hard drives of John and Javier’s computers until early in the afternoon. A preliminary report from the computer analyst reflected that in that interval, a number of files were deleted from John and Javier’s computers. This activity was not disclosed to Staff.
  1. The evidence accumulated to date focuses most significantly on securities related business engaged in by the Respondents between 2007 and 2016 that was not carried on for the account of ICM, processed through the facilities of ICM or recorded on its books and records. During this period, John, Javier and other Approved Persons of ICM:
    1. sold at least $24,000,000 worth of promissory notes offered by IPS, a receivables financing company, to approximately 170 clients of ICM, but did not do so for the account of or through the facilities of the Member and the transactions were not recorded on the books and records of the Member; and
    2. sold at least $1,600,000 worth of promissory notes offered by Energentium, a waste recycling company, to approximately 19 clients of ICM, but did not do so for the account of or through the facilities of the Member, and the transactions were not recorded on the books and records of the Member.
  1. The Respondents also did not disclose to the MFDA or to other securities regulators that:
    1. Approved Persons of ICM were selling or facilitating the sale of the IPS Notes and the Energentium Notes;
    2. IPS and Energentium were companies in which John and Javier held a significant ownership interest, which gave rise to a conflict of interest between them and clients of ICM who were solicited to invest in the Notes;
    3. they were engaged in outside business activities with respect to the management and operation of Energentium and the financing of both IPS and Energentium; and
    4. they were receiving compensation from IPS and Energentium for the solicitation of money for the purchase of the Notes which was not being processed through the facilities of ICM or recorded on its books and records.
  1. The Respondents also did not provide ICM clients who purchased the Notes with prior written disclosure of:
    1. the facts that both IPS and Energentium are non-arm’s length companies in which John and Javier (or companies that they control) hold a substantial ownership interest and in the case of Energentium, that John is the President of the company and his son is the general manager of the company;
    2. the 2% compensation which they received from IPS and Energentium on all amounts solicited for investment in the Notes;
    3. the high risk associated with these unsecured Notes; indeed, John and Javier misrepresented these Notes as secured; and
    4. any information about the financial state and performance of IPS and Energentium, including the number of noteholders and the total value of the debt outstanding to them and to other creditors.
  1. The Respondents also have not been honest with Staff during its present investigation into the sale of the Notes or in the past when specific questions were directed to John and Javier concerning their involvement with IPS specifically or in outside business activities, personal financial dealings and sales of investments outside the Member. As already referred to, when Staff conducted an unscheduled on-site inspection of the Respondents’ office, emails and electronic records of ICM were destroyed, removed or concealed before the hard drives of the computers of Javier and John could be imaged. John and Javier have also provided false or misleading answers in response to questions from Staff about their activities.
  1. Based on the evidence presented to us at the hearing, we were satisfied that the preconditions to s. 24.3.1 and 24.3.2 of By-law No. 1 had been met. That evidence discloses multiple breaches of the MFDA Rules by each of the Respondents, and a failure by the Member to comply with its October 2006 Agreement and Undertaking The proposed Order’s terms and conditions were all supported by s. 24.3.3 of By-law No. 1. In our view, the Order was necessary in order to protect the public, and maintain confidence in the securities industry, the markets and the regulator.

Several Refinements

  1. Paragraph 17 of the Order reads as follows:

If at any time a non-party to this proceeding, with the exception of the bodies set out in section 23 of MFDA By-law No. 1, requests production of or access to exhibits in this proceeding that contain personal information as defined by the MFDA Privacy Policy, then the MFDA Corporate Secretary shall not provide copies of or access to the requested exhibits to the non-party without first redacting from them any and all personal information, pursuant to Rules 1.8(2) and (5) of the MFDA Rules of Procedure.

  1. This is a conventional term which is designed to protect against the unnecessary public disclosure of personal information, most particularly pertaining to clients or investors.
  1. It was originally proposed that a number of exhibits be specifically identified for redaction. Having reviewed each of those exhibits, and being mindful of the presumption of openness that accompanies these proceedings, we suggested that most of the identified exhibits need not be treated in any special way, but instead could simply fall within the general terms of paragraph 17. The remaining two exhibits in issue, if publicly accessed, arguably might lead to the disclosure of Staff’s investigative methods. It was unnecessary for us to make a final determination in that regard. Since these two exhibits, and the single sentence referring to them in the affidavit material, were unnecessary for the purposes of the application before us, they were removed, on consent, from the application record and we placed no reliance on them.
  1. The Order we made also incorporates a protocol to protect against the inadvertent review of privileged documents, electronic or hard copy, by Staff. Counsel for the Respondents alleges that at least one document which is properly the subject of solicitor client privilege was reviewed by Staff before it could be identified as a privileged document. She did not allege that privilege was deliberately violated, but points to this event as support for the need to alter the protocol, captured in our Order and in an incorporated letter, to specifically provide that (a) only those trained in identifying privileged documents should be involved in their initial review; and (b) documents that raise a concern about privilege should be immediately sealed by investigators without any further reading of the documents, pending determination of privilege.
  1. It was appropriate that counsel for the Respondents bring this concern to our attention. It is well recognized that solicitor client privilege must be as close to absolute as possible and will only yield in certain clearly defined and narrow circumstances. The onus is ultimately on the Respondents to identify those documents respecting which they assert solicitor client privilege. That being said, given the volume of documents, electronic and hard-copy to be examined here, it is certainly possible that the Respondents may inadvertently fail to assert solicitor client privilege over a particular document. In saying that, we are not ruling on whether the document that prompted counsel’s concern about privilege was or was not privileged.
  1. At the hearing, we expressed the view, ultimately acceptable to both parties, that the protocol need not be changed as long as we state in our reasons our expectations around it. We agree that any investigator initially examining the documents taken from the Respondents should be alive to the privilege issue, and receive some basic instruction on privilege, if this has not already been done specifically for this case or as part of his/her training. Second, an investigator has the obligation, if he/she comes upon a document that appears to be privileged, though not already identified by the Respondents as such, to stop reading the document, seal it and advise counsel for the Respondents that its status must be determined in accordance with the protocol. This expectation is consistent, for example, with the ethical obligations imposed on Ontario lawyers when privileged documents have inadvertently been sent to them by the opposing party.
  1. We also expressed concern about the absence of any meaningful notice to the Noteholders in IPS and Energentium (other than Related Individuals or Financially Related Entities) about the current situation, and how their questions or concerns should be addressed. We were advised that the OSC would be looking at this issue, in conjunction with the MFDA. We regard this to be a critical concern to be addressed as soon as possible. After all, protection of these Noteholders is of paramount importance now and going forward.
  1. We will re-convene on January 24, 2017, pursuant to the Order, to determine what, if any changes should be made to it. The parties agreed to the terms of the Order, without prejudice to either party seeking to add to, delete or refine any of the current terms. In effect, our Order is being treated as an interim interim measure. We found this an acceptable approach in the circumstances. It enabled us to impose detailed restrictions on the Respondents’ activities promptly. When we return, we also hope to be advised of what measures are proposed or have already been implemented, to address our concern about the Noteholders in IPS and Energentium.
  1. We are grateful to all counsel for their assistance.

 

[1] MFDA By-law No. 1 defines “securities related business” as follows: “securities related business” means any business or activity (whether or not carried on for gain) engaged in, directly or indirectly, which constitutes trading or advising in securities for the purposes of applicable securities legislation in any jurisdiction in Canada, including for greater certainty, securities sold pursuant to exemptions under applicable securities legislation.

  • Mark J. Sandler
    Mark J. Sandler
    Chair
  • Linda J. Anderson
    Linda J. Anderson
    Industry Representative

522048