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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 CANAD

Re: Christopher Martin Alfred Lee

Heard: June 6, 2019 in Toronto, Ontario
Reasons For Decision: September 3, 2019

Reasons For Decision

Hearing Panel of the Central Regional Council:

  • Frederick W Chenoweth, Chair
  • Jeffery Page, Industry Representative

Appearances:

Alan Melamud, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Christopher Martin Alfred Lee, Respondent, by teleconference

Background

  1. As appears from the Affidavit of Service of Dylan Scott, which was marked as Exhibit 2 in this proceeding, a copy of the Notice of Hearing dated February 15, 2019 (“Notice of Hearing”) was served on Christopher Martin Alfred Lee (“the Respondent”) on the 26th day of February, 2019 at 10:38 a.m., by way of personal service. Thereafter, on April 9th, 2019, in the City of Toronto, a first appearance in this matter was held by teleconference.  At that time, it was ordered that a hearing on the merits of this matter would be held at the City of Toronto on June 6, 2019 before a Hearing Panel of the Central Regional Council.
  2. Thereafter, and on June 4th, 2019, the Respondent filed an Amended Reply to the Notice of Hearing pursuant to which the Respondent admitted the facts alleged and the conclusions drawn by Staff of the Mutual Fund Dealers Association of Canada (the “Staff”) in paragraphs 1 to 25 of the Notice of Hearing.

The Contraventions

  1. In the Notice of Hearing, it is alleged that:
    1. Allegation #1: Commencing on at least July 28, 2012, the Respondent misappropriated or failed to account for, approximately $1,363,850.00 solicited or received from at least 12 clients and 7 individuals, thereby failing to deal fairly, honestly and in good faith with clients, failing to observe high standards of ethics and conduct in the transaction of business, and engaging in business conduct or practice that is unbecoming or detrimental to the public interest, contrary to the Members’ Policies and Procedures and MFDA Rule 2.1.1, 2.10, and 1.1.2;
    2. Allegation #2: Commencing in or about October 16th, 2018, the Respondent failed to cooperate with MFDA Staff’s investigation into his conduct contrary to s. 22.1 of MFDA By-Law #1.
  2. Staff withdrew and has not advanced Allegation #2 in the Notice of Hearing.

The Facts

  1. The relevant facts are those set out in paragraphs 1 to 17 of the Notice of Hearing, which is attached as Appendix “A” to these Reasons, subject to the following amendments to paragraphs 6, 13 and 14:
    1. The amount misappropriated was $1,363,400; and
    2. The amount paid as redemptions was $23,200.

    Again, the Respondent, in his Amended Reply dated June 4, 2019, admitted the facts alleged in paragraphs 1 to 25 of the Notice of Hearing.

Discussion

  1. The standard of proof in administrative proceedings, such as those instituted pursuant to MFDA By-law No. 1, is the civil standard of balance of probabilities. Since 2008, it has been settled law in Canada that “there is only one civil standard of proof at common law and that is proof on a balance of probabilities.” The Supreme Court of Canada has rejected the notion that the seriousness of the allegations or consequences change the standard of proof. In all civil cases, the trial judge must scrutinize relevant evidence with care to determine whether it is more likely than not that an alleged event occurred. Evidence must always be sufficiently clear, convincing, and cogent to satisfy the balance of probabilities test, but there is no objective standard to measure sufficiency.
    1. Brauns (Re), 2013 LNCMFDA 68 at para. 15.
    2. F.H. v. McDougall, [2008] 3 S.C.R. 4l at paras 40, 45, 46 and 49.
  2. Accordingly, Staff bears the burden of proving the allegations against the Respondent on a balance of probabilities.
    1. Brauns (Re), supra at para. 15.
    2. Section 24.1.1 of MFDA By-law No. l.
  3. As admitted by the Respondent, he misappropriated $1,363,400 from 12 clients and 7 individuals (the “Investors”), by misleading them to invest in a special opportunity, which he represented would provide a guaranteed annual return of 4% or 5%. The Respondent led the clients to believe that the special opportunity was a Member and/or London Life investment product, and in some instances produced false account statements reflecting the investment. The special opportunity did not exist, and the Respondent used the funds solicited to pay his personal expenses.
  4. The standard of conduct codified by MFDA Rule 2.1.1 requires that Members and Approved Persons deal fairly, honestly, and in good faith with clients; observe high standards of ethics and conduct in the transaction of business; and refrain from engaging in any business conduct or practice which is unbecoming or detrimental to the public interest. The Rule is central to the MFDA mandate of enhancing investor protection and strengthening public confidence in the Canadian mutual fund industry.
    1. MFDA Rule 2.1.1.
    2. Breckenridge (Re), 2007 LNCMFDA 38 para. 71.
  5. The misappropriation of client funds is antithetical to the standard of conduct. It is an egregious form of misconduct, which involves a significant breach of trust, causes serious harm to the clients and others affected, and shakes public confidence in the Canadian mutual fund industry. Accordingly, Hearing Panels have repeatedly found that the misappropriation or failure to account for client monies is a contravention of MFDA Rule 2.1.1.
      1. Backer (Re), 2019 LNCMFDA 14 at paras. 55, 57, 70.
      2. Ng (Re), 2016 LNCMFDA 8l at paras. 89, 106.
      3. Mclntosh (Re), 2013 LNCMFDA 58 at paras. 7, 12.

    Piggou (Re), 2007 LNCMFDA 3l at para. 54.

  6. The Respondent’s conduct clearly contravened MFDA Rule 2.1.1. The Respondent misappropriated funds from the Investors by falsely inducing them to believe he was investing their money. In several instances, the Respondent arranged for the Investors to redeem existing investments to invest in the “special opportunity”, resulting in deferred sales charges or other redemption fees and the loss of potential gains on the investments. The Respondent further concealed his misconduct, giving some of the Investors a false sense of security, by sending falsely manufactured statements.
  7. The Member’s policies and procedures required its Approved Persons to deal fairly, honestly, and in good faith with clients in the transaction of business, and to conduct business with the investing public solely based on a desire to promote the best interests of clients. The Respondent’s misappropriation of funds from the Investors clearly contravened this requirement.
    1. Exhibit 5, Affidavit of Lucy Alfenore, sworn May 3l, 2019, para.4.
  8. Rule 2.10 requires Members to establish and maintain written policies and procedures for dealing with clients and ensuring compliance with the Rules, By-laws and Policies of the MFDA and applicable securities regulation. Approved Persons have a corresponding obligation to comply with those policies and procedures pursuant to Rule 1.1.2. As stated by the Hearing Panel in Franco (Re):
    1. The obligation of Approved Persons to comply with the policies and procedures of the Member that they are registered with is a cornerstone of the self-regulatory system. When Approved Persons disregard those obligations, the Member’s ability to supervise the conduct of such Approved Persons and protect the interests of clients and the public is undermined.
      1. Franco (Re), 2011 LNCMFDA 55 at para. 38.
      2. Frank (Re), 2015 LNCMFDA 75 at paras. 56-58.
      3. MFDA Rule 2.10.
      4. MFDA Rule l.1.2.
  9. Accordingly, the Respondent’s conduct contravened MFDA Rules 2.10 and 1.1.2.

Penalty

  1. Pursuant to s. 24.1.1(i) of MFDA By-law No. 1, if, in the opinion of a Hearing Panel, an Approved Person has failed to comply with the provisions of any By-law, Rule, or Policy of the MFDA, a Hearing Panel can impose any of the penalties set out in s. 24.l.l(a)-(f), including a permanent prohibition of the authority of the Approved Person to conduct securities related business and a fine, not exceeding $5,000,000.
    1. MFDA By-law No. l, s, 24.1.1.
  2. Pursuant to s. 24.2 of MFDA By-law No. 1, the Hearing Panel has the discretion to require a Member or Approved Person to pay the whole or part of the costs of the proceeding before the Hearing Panel and any investigations relating to that proceeding.
    1. MFDA By-law No. 1, s. 24.2
  3. The primary goal of securities regulation is the protection of investors and fostering public confidence in the capital markets and the securities industry. In Tonnies (Re), the Hearing Panel recognized that its role when imposing sanctions is not the punishment of the Respondent, but rather restraining future misconduct in furtherance of these goals. The Hearing Panel stated:
    1. The Ontario Securities Commission has set out succinctly its role, not dissimilar to the role of this Panel, in determining penalty in Re Mithras Management Ltd. et al. (1990), 13 O.S.C.B. 1600. The Commission stated at 1610:
    2. … [T]he role of this Commission is to protect the public interest by removing from the capital markets – wholly or partially, permanently or temporarily as the circumstances may warrant – those whose conduct in the past leads us to conclude that their conduct in the future may well be detrimental to the integrity of those capital markets. We are not here to punish past conduct; that is the role of the courts, particularly under section 118 of the Act. We are here to restrain, as best we can future conduct that is likely to be prejudicial to the public interest in having capital markets that are both fair and efficient.
    3. Tonnies (Re), 2005 LNCMFDA 7 at para.45.
    4. Pezim v. British Columbia (Superintendent of Brokers), [1994] 12 S.C.R. 557 at paras. 59, 68.
    5. Breckenridge (Re), supra at para. 74.
  4. The Hearing Panel agreed with Staff’s Submissions that sanctions imposed by a Hearing Panel should therefore be protective and preventative to prevent likely future harm to the markets. To determine whether a sanction is appropriate, the Hearing Panel should consider:
    1. the protection of the investing public;
    2. the integrity of the securities markets;
    3. specific and general deterrence;
    4. the protection of the MFDA’s membership; and
    5. the protection of the integrity of the MFDA’s enforcement processes;
    6. the Sanction Guidelines of the MFDA.
    1. Tonnies (Re), supra at paras. 44, 46.
    2. Breckenridge (Re), supra at para.74.
  5. Hearing Panels have also previously considered the following factors when determining whether a sanction is appropriate:
    1. the seriousness of the allegations proved against the Respondent;
    2. the Respondent’s past conduct, including prior sanctions;
    3. the Respondent’s experience and level of activity in the capital markets;
    4. whether the Respondent recognizes the seriousness of the improper activity;
    5. the harm suffered by investors as a result of the Respondent’s activities;
    6. the benefits received by the Respondent as a result of the improper activity;
    7. the risk to investors and the capital markets in the jurisdiction, were the Respondent to continue to operate in capital markets in the jurisdiction;
    8. the damage caused to the integrity of the capital markets in the jurisdiction by the Respondent’s improper activities;
    9. the need to deter not only those involved in the case being considered, but also any others who participate in the capital markets, from engaging in similar improper activity;
    10. the need to alert others to the consequences of inappropriate activities to those who are permitted to participate in the capital markets; and
    11. previous decisions made in similar circumstances.
    1. Tonnies (Re), supra at para.48.
    2. Breckenridge (Re), supra at para.77.
  6. In respect of the factors considered in this particular case, the Panel was mindful that:
    1. As found by the Hearing Panel in Ng (Re), “misappropriation is among the most serious types of misconduct encountered by securities regulators. . .” The Respondent was in a position of trust with his clients, which he exploited to misappropriate funds for his own use.
      1. Ng (Re), supra at paras. 106-107.
    2. This serious misconduct is further aggravated in this case, where the Respondent used his position of trust to arrange for the Investors to redeem existing investments, so they would have sufficient funds for him to misappropriate through the guise of the “special opportunity”.
    3. The Sanction Guidelines and MFDA Hearing Panels have identified the involvement of “vulnerable investors” and evidence of “premeditation” as aggravating factors. Thirteen of the Investors were over the age of 60, and therefore constituted vulnerable investors on account of their age. The Respondent’s premeditation is evident from his use of two numbered companies to conceal his misconduct and the sheer scale of his misappropriation.
      1. MFDA Sanction Guidelines, p. 3.
      2. Desgroseilliers (Re), 2018 LNCMFDA 172 at para. 5l.
      3. Vandermey (Re), 2017 LNCMFDA 197 at para.33.
    4. The Respondent has not previously been the subject of an MFDA disciplinary proceeding. However, given the seriousness of the Respondent’s misconduct, this is not a significant mitigating factor.
    5. The Hearing Panel is satisfied that the Respondent recognized the seriousness of his misconduct and has admitted his misconduct in his Amended Reply, therefore avoiding the necessity of a full hearing on the facts in a contested disciplinary hearing.
    6. The Respondent benefitted from the receipt of at least $1,386,600. While a portion of this was repaid to the clients and others, importantly, this was done solely to maintain the charade when an Investor requested a redemption.
    7. The Respondent posed an ongoing serious risk to investors if he were permitted to continue to operate in the capital markets. The Respondent’s misconduct is egregious.
    8. The Respondent has caused significant damage to the integrity of the capital markets. The ability of the mutual fund dealers to facilitate the participation of the public in the capital markets, requires that investors trust mutual fund dealers with their money.  The misappropriation of a client’s and other funds undermines this trust, harming the mutual fund industry and the capital markets more broadly.
      1. Ayala (Re), 2017 LNCMFDA 23T at para. 11.

Result

  1. For all the above reasons, the Panel concluded that the contraventions to which the Respondent has admitted are extremely serious. Accordingly, the following penalties were imposed upon the Respondent:
    1. The Respondent is permanently prohibited from conducting securities related business in any capacity while in the employ of or associated with any MFDA Member, pursuant to s. 24.1.1(e) of MFDA By-law No.1;
    2. The Respondent shall pay a fine in the amount of $1,463,400, pursuant to s. 24.1.1(b) of MFDA By-law No. 1;
    3. The Respondent shall pay costs in the amount of $13,100, pursuant to s. 24.2 of MFDA By-law No. 1; and
    4. If at any time a non-party to this proceeding, with the exception of the body set out in s. 23 of MFDA By-law No. 1, request 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 Rule 1.8(2) and (5) of the MFDA Rules of Procedure.
  • Frederick W Chenoweth
    Frederick W Chenoweth
    Chair
  • Jeffery Page
    Jeffery Page
    Industry Representative

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