Reasons For Decision

10.3.1 The central issue in this proceeding is whether the amount received by the Respondent from client RW was “borrowed”. In other words, was the $16,000.00 a loan from client RW to the Respondent.

10.3.2 While maintaining at all times that the transaction was a loan, the MFDA took the position that “the Respondent’s conduct constituted a conflict of interest …” and that the panel was “permitted to find that the Respondent violated MFDA Rule 2.1.4 regardless of whether the monies advanced by client RW are characterized as a “loan.” The panel disagrees with this submission by the MFDA. There are many cases which conclude that MFDA allegations need not be drafted with the precision of criminal proceedings, but that a Respondent is entitled to know the case which he will be required to meet. See e.g. Re Clinton Wayne 2018, MFDA File No. 201507, Re Blackmont Capital Inc. 2011 BCSCCOM 490, Re Myatovic 2012 IIROC 47, Re Castonguay 2012 IIROC 76 and Re Russell Chang 2015, MFDA File No. 201431. In drafting allegation 1, the MFDA had a choice as to how to characterize the transaction between client RW and the Respondent, e.g. a loan, a gift or otherwise, and still bring it within the Rules alleged to have been breached, none of which specifically refer to a loan. The allegation specified a loan, and from the standpoint of procedural fairness to the Respondent, it is the panel’s conclusion that the MFDA must prove that the transaction was a loan.

10.3.3 The Respondent testified that he never considered the amount received to be a loan, but rather a gift to enable him to travel to Mexico to visit his close friend (and client) RW who was suffering health problems at that time. The Respondent testified that, in a phone conversation with client RW in the fall of 2012, he told client RW that he could not come to Mexico as he had done regularly, because he could not afford to do so, due in part to a large debt owing to Revenue Canada. According to the Respondent, client RW replied, “What do you need”, but the Respondent did not ask for the money, client RW did not ask for any documentation evidencing the transaction and there was no discussion of a payback or a loan. Respondent’s counsel also submitted that “these were enabling funds for which the Client RW derived …the exclusive benefit.” Its sole purpose was to enable the Respondent to come to Mexico to provide help and comfort to his ailing friend. The panel does not agree that the Respondent received no benefit from the money.  Client RW may have benefited from the Respondent’s trip to Mexico, but so did the Respondent. Also, the transaction can be a loan even if the Respondent did not request it and even if it was not documented at the time. Furthermore, by the Respondent’s own testimony, client RW did not restrict the Respondent’s use of the money. Unfortunately, the panel received no evidence from client RW about this conversation as he died on November 2, 2017. However the panel received documentary evidence that client RW considered the advances to be a loan. This is reviewed in paragraph 10.3.6 and following.

10.3.4 The Respondent testified that the first time client RW asked to be repaid was in January 2013 in Mexico. Upon the Respondent returning from the grocery store, client RW asked angrily, “where’s my money”. The Respondent testified that he did not initially understand that client RW was asking to be repaid the $16,000.00 because he did not consider the advances to be a loan, he had never asked for a loan and had not been told that the advances were a loan. However, in order to de-escalate the situation and calm client RW, he offered a $16,000.00 cheque and said he would repay the money when he could afford to do so as a friend would do. He testified that he did not consider the advances to be a loan, but did not say so to client RW at the time.

10.3.5 In his testimony, the Respondent attempted to characterize the $16,000.00 as no different that the common casual payments made between friends on each other’s behalf, in this case to pay for the Respondent’s trip to Mexico, but was not a loan. However, in response to questions from the panel, the Respondent acknowledged that the $16,000.00 was far greater than the prior minor financial accommodations  between them, was far greater than the cost of a trip to Mexico, and that the money could be used by him to help repay the debt owing to Revenue Canada and other personal items, e.g. his $1500 condo fees in Toronto.

10.3.6 In addition to the Respondents oral testimony, the panel received documentation relevant to the issue of whether the advances were a loan.

10.3.7 It is not disputed that, on September 12, 2013, the Respondent signed a demand promissory note for $16,000.00 in favour of client RW in which the Respondent is described as “Borrower”. The Respondent testified that he signed the note only because client RW insisted on having a record of the amount outstanding and not as an acknowledgement of a loan. However, on cross-examination, MFDA counsel asked the Respondent whether the promissory note “obligated you to repay [RW].” to which the Respondent replied “… it was always my intention to repay the loan.” What the Respondent did not say at the time of signing the note was also significant. In the Respondent’s own testimony about the signing, he never attempted to change his description as “Borrower” and never stated to client RW that he did not consider the advances to be a loan, nor did he make any other protestation about signing the note. In addition, the panel notes that the Respondent had a long history in the banking business as well as the securities business, and therefore would be familiar with the purpose and effect of promissory notes as well as their wording. The Respondent’s counsel submitted that there was no fresh consideration for the promissory note and therefore it was unenforceable. It is the panel’s conclusion that even if that submission were correct, that assertion would be relevant only in the civil suit brought by client RW. In these proceedings, the promissory note is only evidence of the loan from client RW to the Respondent whether or not it is enforceable.

10.3.8 In 2015, client RW initiated a civil suit in small claims court claiming repayment from the Respondent of a loan of $16,000.00. This suit is evidence that client RW considered the $16,000.00 to have been a loan. The panel was not provided with copies of the Small Claims Court claim, but the Respondent did not dispute that it occurred or that it was to recover a loan to the Respondent.

10.3.9 The Respondent testified that he filed a defense to the Small Claims Court suit. However, the Respondent did not provide a copy of his defense to this panel. The panel finds the Respondent’s failure to do so to be significant; if the Respondent had considered the $16,000.00 not to be a loan, he would have stated so in his defense to the civil suit and would have put that defense in evidence in this hearing.

10.3.10 The Respondent signed Minutes of Settlement of the Small Claims Court claim in which he agreed to pay $16,000.00 to client RW and which he admitted were signed in respect of the claim on the promissory note. In addition he made three payments of $500.00 each pursuant to the settlement. The Respondent’s counsel claimed that the Minutes of Settlement do not specifically refer to a “loan”. The panel considers that to be irrelevant. The Minutes were not put in evidence in this hearing, but there was no dispute that the Minutes were in settlement of the civil suit by client RW against the Respondent and the Respondent does not dispute that the claim in the civil suit was to recover a loan of $16,000.00 from client RW to the Respondent. In addition, the Respondent claims that he only signed the Minutes of Settlement in order to avoid having to make a court appearance. This panel does not accept that explanation. If the Respondent wanted to avoid a court appearance, he would not have filed a defense and would have paid the claim when the claim was issued. In any event, the time for reporting the civil suit to the Member was within two days of receiving notice of the suit, long before the Minutes of Settlement.

10.3.11 Client RW filed a complaint with the MFDA which was Exhibit 12 to the affidavit of Stephen Davis, MFDA’s investigator, detailing his loan to the Respondent.

10.3.12 The Respondent drafted an email to James MacNeil of Queensbury which was Exhibit 13 to the Davis affidavit; in it the Respondent indicated that he had received “personal financial accommodations” from client RW which “were always satisfied in a timely manner” and “it has been my intention to satisfy this outstanding amount which, as I said is imminent.”

10.3.13 The panel also finds it significant that the Respondent did not deny that the advances were a loan until these proceeding commenced, and did not put in evidence any documentation to support his claim, in particular the statement of defense in the client RW civil suit. That denial came only in the Response to the NOH and in his testimony at the hearing. However, in his own testimony, when describing his conversations with client RW in the fall of 2012 and January 2013, when signing the promissory note and when signing the minutes of settlement, the Respondent never said to client RW that he did not consider the advances to be a loan.

10.3.14 Based on the oral and documentary evidence outlined above and the absence of contrary evidence prior to commencement of these proceedings, it is the panel’s conclusion that the Respondent borrowed $16,000.00 from client RW as alleged.

16.1.1 This Rule requires that:

1. APs be aware of possible conflicts of interest and disclose conflicts or potential conflicts to the Member;
2. APs must ensure that conflicts are addressed by the exercise of responsible business judgment, influenced only by the best interests of the client; and
3. such conflicts shall be immediately disclosed in writing to the client.

16.1.2 As stated in paragraphs 12, 13 and 14, the MFDA has proven all the elements of Rule 2.1.4 and therefore it is the panel’s decision that allegation 1 has been proven in regard to that Rule.

16.3.1 MFDA Rule 2.1.1 requires, among other things, that:

“Each Member and Approved Person of a Member shall: deal fairly, honestly and in good faith with its clients; observe high standards of ethics and conduct in the transaction of business; and not engage in any business conduct or practice which is unbecoming or detrimental to the public interest.”

16.3.2 MFDA Panels have repeatedly held that an AP who engages in personal financial dealings or enters into in a conflict of interest position with a client has engaged in conduct that is contrary to MFDA Rule 2.1.1. See Davis, (supra), Re Mervin Evans Visneskie, [2017], MFDA File No. 201553.

16.3.3 MFDA Panels have further held that an AP who breaches the Member’s Policies and Procedures also has engaged in conduct that is contrary to MFDA Rule 2.1.1. See Davis, (supra) at para 39, and Tonnies,(supra)

16.3.4 This panel agrees with the MFDA, that the Respondent’s conduct in this case was not consistent with the standard of conduct required in the industry and accordingly, the Respondent contravened MFDA Rule 2.1.1 as:

1. he failed to deal fairly, honestly and in good faith with his client by obtaining an unsecured loan that he failed to repay,
2. he failed to observe high standards of ethics and conduct in the transaction of business by not complying with the policies and procedures of the Member and MFDA Rule 2.1.4; and
3. his conduct also constituted business conduct which was unbecoming and detrimental to the public interest.

17.2.1 According to the affidavit and testimony of Webster of Queensbury, in advance of his registration with Queensbury, the Respondent completed a Due Diligence Questionnaire on September 17, 2013 in which the Respondent answered “No” to the question, “Do you or have you lent or borrowed money to/from clients.” This answer was provided only 4 days after the Respondent signed the promissory note in favour of client RW in which the Respondent is described as the “Borrower”.

17.2.2 In addition, on December 30, 2013, December 9 2014, December 30, 2015 and January 23, 2017, the Respondent answered “No” to the question “Have you borrowed from or lent money to a client.”

17.2.3 In his affidavit, Webster stated that he believed that these answers were false based on the disclosure of the transfer of money from client RW to the Respondent between September and December 2012 that had not been repaid at the time the Respondent answered the questions. He testified  that the questions were not limited to the AP’s time at Queensbury, but meant borrowing or lending whenever the transaction occurred.

17.2.4 The Respondent’s position (as it was regarding allegation 1) is that he did not “borrow” money from client RW and therefore these answers were correct and not misleading.

17.2.5 As the panel has concluded that the transfer of money from client RW to the Respondent was a loan which was not repaid at the time of the Respondent’s answers, the panel’s decision is that these answers were false and misleading to Queensbury.

17.2 6 In the Queensbury annual questionnaires, the Respondent also answered “No” to the question, “Have you ever been a defendant or respondent in any civil proceeding…in which fraud, theft, deceit, misrepresentation, or similar conduct is, or was, alleged. The only “civil proceeding” in issue in this case is the Small Claims Court action brought by client RW to collect what he claimed was a debt owing to him by the Respondent. That claim does not involve fraud, theft, deceit, misrepresentation, or similar conduct. Therefore the panel concludes that this question was answered accurately by the Respondent and did not mislead Queensbury.

17.3.1 Since the loan was not disclosed to Queensbury, it had no way of supervising the Respondent in that regard. This portion of the allegation was not questioned by the Respondent, basing his position on denying that the transaction was a loan. The panel’s decision is that this part of allegation 2 has been proven.

17.4.1 As noted in relation to allegation 1, Rule 2.1.1 encompasses the most fundamental obligations of all registrants in the securities industry. Under MFDA Rule 2.1.1(b), Approved Persons are to conduct themselves in accordance with “high standards of ethics and conduct” in the transaction of mutual fund business. Furthermore, MFDA Rule 2.1.1(c) prohibits APs from engaging in conduct that is unbecoming or detrimental to the public interest. This panel agrees with MFDA’s position that misrepresentations to the Member are inconsistent with both of these provisions as decided in previous cases cited to us. See e.g. Visneskie, supra at para 23, and Re Paul Leland Wemple, [2017], MFDA File No.201654.

17.4.2 The Respondent’s testimony was that he did not borrow money from client RW, and therefore, when answering the Queensbury questionnaires, his answer that he had not borrowed from a client was what he truthfully believed. The MFDA submitted that the “Respondent intentionally denied that he had borrowed monies from…client RW while knowing the statements to be untrue” when answering the questionnaires.

17.4.3 While it is possible to speculate that the Respondent intentionally misled Queensbury regarding the loan, there is no direct evidence to that effect and the panel’s decision is not based on that assertion. Rather, our decision is based on our conclusion, as detailed in paragraph 10 above, that the transaction with client RW was, in fact, a loan and the Respondent cannot escape that conclusion by a simple assertion that he did not believe that he had borrowed from client RW, in particular since the Respondent did not provide any evidence that he made that assertion at any time prior to commencement of these proceedings; furthermore, when responding to the Queensbury questionnaires, the Respondent knew that he had signed the promissory note as “Borrower” only 5 days prior to the initial questionnaire; and, when answering all the questionnaires, the Respondent knew that client RW claimed that the Respondent had  borrowed  money from client RW. In addition, both Members’ CPPMs and  MFDA Notices #MSN-0047 and MSN-0054 (supra) emphasized that borrowing from clients would not be allowed, or at least was strongly discouraged. As an experienced AP, the Respondent knew, or is deemed to know that the industry strongly discourages borrowing from clients. If not intentionally misleading Queensbury, at a minimum the Respondent simply ignored industry standards and the evidence of the borrowing from client RW when answering the questionnaires. In doing so, it is the panel’s decision that the Respondent’s conduct is a violation of MFDA Rule 2.1.1.

17.5.1 MFDA Rule 2.5.1 requires Members to establish, implement and maintain policies and procedures to ensure the handling of its business is in accordance with MFDA By-laws, Rules and Policies; and MFDA Rule 1.1.2 places a corresponding obligation on APs to do their part to facilitate compliance by the Member with MFDA Rules including, in this context, by complying with the policies and procedures established and implemented by the Member to comply with its regulatory obligations to supervise the conduct of its APs.

17.5.2 This panel agrees with previous MFDA Panels which have held that where an AP misleads the Member and in turn fails to comply with the Member’s Policies and Procedures, the AP contravenes MFDA Rule 1.1.2. However as explained in paragraph 16.2 above the AP does not breach MFDA Rule 2.5.1

17.5.3 The Respondent’s disregard for the prohibition on borrowing and the obligation to disclose conflicts of interest to the Member also contravened the Queensbury’s Policies and Procedures and, in so doing, contravened MFDA Rule 1.1.2.