Hearing Panel of the Pacific Regional Council:
- Joseph A. Bernardo, Chair
- Holly Martell, Industry Representative
Zaid Sayeed, Enforcement Counsel for the Mutual Fund Dealers Association of Canada
Shelly M. Feld, Director, Chief Litigation Counsel, Enforcement
Matthew Elliott de Haan, Respondent
- The Respondent was registered as a dealing representative with Sun Life Financial Investment Services registered (Sun Life), a Member of the Mutual Fund Dealer’s Association of Canada (MFDA).
- On January 18, 2021, the staff of the MFDA (Staff) issued a Notice of Hearing alleging that:
- between October and December 2018 the Respondent had solicited one client and at least six other individuals to invest in an investment that was not approved for sale by Sun Life, contrary to the Member’s policies and procedures and MFDA Rules 1.1.1, 1.1.2, 2.1.1, and 2.5.1;
- the solicitations constituted unapproved outside business activity, contrary to the Member’s policies and procedures and MFDA Rules 1.1.2, 1.3.2, 2.1.1, and 2.5.1; and
- on or about December 7, 2018, the Respondent made a false or misleading statement to the Member, contrary to MFDA Rule 2.1.1.
- An electronic disciplinary hearing concerning these allegations was held on August 9 and 10, 2021.
- At the commencement of the hearing the parties submitted an agreed statement of facts (ASF), following which the matter was adjourned to the next day. The ASF is attached as Appendix “A”.
- On August 10, 2021, the Respondent testified on his own behalf and the Hearing Panel received submissions from both parties.
- The hearing concluded with the Hearing Panel ordering sanctions against the Respondent. The Order is attached as Appendix “B”.
- These are the reasons for the Hearing Panel’s decision.
- In the ASF, the Respondent admitted the contraventions alleged in the Notice of Hearing on the basis of the following agreed facts:
- The Respondent was a dealing representative with Sun Life in Abbotsford, British Columbia from July 8, 2016 to December 12, 2018, the effective date on which he resigned from the Member. He is not currently registered in the securities industry in any capacity.
- Some time in October 2018, the Respondent entered into a sales arrangement with Impact International Secured Investments Corporation (Impact), a British Columbia corporation. This arrangement was subsequently confirmed in an October 29, 2018 written agreement made between the Respondent and Impact (Agreement).
- Under the Agreement, the Respondent agreed to solicit investors to raise capital on Impact’s behalf. This capital was to be used to structure bonds, purchase bonds, or otherwise serve as working capital for projects for which Impact was arranging financing. For his part, the Respondent was to receive a 10% commission on any transactions that resulted in a completed investment in Impact.
- Impact provided promotional materials to the Respondent to use in soliciting investors. In these materials, Impact claimed to be structuring a bond to fund a wind farm project in the United States. To participate in the bond, a minimum investment of USD $500,000 was required. The total return on this amount over seven years was projected to be 7468%, as follows:
- an immediate return of $1,000,000 upon the completion of financing in December 2018;
- an average of $2,000,000 per year for seven years in royalty revenue from the wind farm;
- an average of $7,500,000 per year for three years in royalty revenue from a source called “Fintech Net Revenue”; and
- $350,000 to be received at the end of the fifth year in respect of returns from gold assets that Impact claimed it would hold as collateral.
- From on or about November 1, 2018 to December 3, 2018, the Respondent solicited at least seven individuals, including one Sun Life client, to participate in the purported bond investment by engaging in one or more of the following activities:
- introducing it them as an investment opportunity;
- providing them with promotional and advertising materials;
- discussing the terms and features of the bond with them, including the purported returns;
- providing them with an assessment of the risks and merits of investing in the bond;
- recommending the bond to them as an investment; and
- sending them notes concerning the bond investment personally prepared by the Respondent relying on information Impact had provided him.
- At all material times, Sun Life’s policies and procedures required its Approved Persons to:
- obtain the Member’s written consent prior to engaging in any business or occupation outside of registered activities conducted on Sun Life’s behalf;
- conduct all securities related business solely through the Member’s auspices; and
- offer only investment products that had been approved by Sun Life.
- The Respondent was aware that he was required to obtain Sun Life’s approval prior to entering into the Agreement, but did not do so.
- Impact’s purported bond was not an investment Sun Life had approved for sale by its Approved Persons.
- The Respondent’s solicitations occurred without Sun Life’s approval.
- None of the Respondent’s activities in relation to the bond investment were carried on for the account or through the facilities of Sun Life.
- In December 2018, Sun Life became aware that the Respondent had been soliciting investments outside of the Member’s auspices and commenced an investigation. During an investigative interview conducted on December 7, 2018, the Respondent represented to the Member that he had not solicited Sun Life clients to invest in the Impact bond. This was not true. One individual solicited by the Respondent was a Sun Life client.
- The Respondent cooperated with the MFDA’s investigation. He has not previously been the subject of MFDA disciplinary proceedings.
- There is no evidence that any of the persons solicited by the Respondent invested in Impact’s bond, or that he derived any financial benefit from promoting it.
- The parties supplemented the ASF by jointly confirming that the Respondent’s only experience in the securities industry was his period of employment as an Approved Person with Sun Life.
- In his testimony, the Respondent sought to provide context for his conduct by explaining that:
- He had become involved with Impact because he was not earning enough income and was financially desperate.
- The one Sun Life client he spoke to about the Impact bond was a personal friend, from whom the Respondent was not so much soliciting investment as seeking an opinion. He acknowledged that doing so was nonetheless a breach of the Rules.
- The December 7, 2018 investigative interview took place by phone while the Respondent was travelling in a car, and when he was asked whether he had solicited any clients the Respondent had not been in a position to review his records. He acknowledged that this reply was inaccurate, and that he should have subsequently checked his records and then contacted Sun Life to correct his answer.
- Under cross-examination, the Respondent effectively reiterated the particulars of his misconduct as set out in the ASF.
- An Approved Person is required by MFDA Rule 2.1.1 to observe high ethical standards, which includes refraining from business conduct that is unbecoming or detrimental to the public interest.
- This general ethical obligation overlaps with the more specific requirements the Rules impose on an Approved Person. For present purposes, the relevant Rules are these:
- Rule 1.1.1, which prohibits an Approved Person from engaging in any securities related business unless it is done for the account and through the facilities of the employing Member.
- Rules 1.1.2 and 2.5.1, which obligate an Approved Person to follow the Member’s supervisory policies and procedures.
- Rule 1.3.2, which prohibits an Approved Person from carrying on any business outside of their employment duties without the Member’s prior written approval.
- The ASF establishes that the Respondent promoted the Impact bond to seven persons outside of Sun Life’s auspices for the purpose of earning commission income. This was done without the Member’s prior written approval and contrary to its policies and procedures. When Sun Life subsequently asked him whether he had promoted the bond to any of the Member’s clients, the Respondent provided incorrect information.
- Nothing in the Respondent’s testimony or elsewhere in the record contradicts the ASF or otherwise creates any uncertainty about the material facts of this case. In other words, the evidence unambiguously confirms the Respondent’s admission of liability.
IV. SANCTION ANALYSIS
- The sole material disagreement between the parties, and the substantive issue to be decided by the Hearing Panel, was over what consequences the Respondent should face as a result of his misconduct.
- Enforcement Counsel on behalf of Staff argued that taking all the relevant facts into consideration the following sanctions would be appropriate:
- a financial penalty of at least $15,000;
- costs of $5,000, which was supported by a bill of costs; and
- a prohibition of at least 12 months.
- Against this, the Respondent submitted that the proposed financial penalty was excessive given his thorough co-operation with the MFDA investigation, the fact that none of the persons he solicited ever invested in the Impact bond, and his wholesale admission of fault in these proceedings.
- The essential purpose of securities legislation is to establish a comprehensive regulatory framework that protects the investing public. As a component of this framework, MFDA enforcement proceedings are required to be forward looking, which is to say preventative and not retrospective or punitive in orientation. That is, a hearing panel must have a rational basis for believing that ordering sanctions will serve to prevent likely future harm. In making this determination, general deterrence is a critical consideration.
- Pezim v. British Columbia (Superintendent of Brokers),  2 S.C.R. 557, at paras. 59, 68.
- Cartaway Resources Corp. (Re),  1 S.C.R. 672 at para. 61.
- The degree to which general deterrence deserves to be emphasized in a sanction decision turns on the circumstances of the case. To be reasonable, a penalty must be supported by analysis that establishes it as proportional to the misconduct.
- Cartaway, supra, at para. 64.
- Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 at paras. 14, 85.
- This principle of proportionality is central to the MFDA’s sanction guidelines, which, among other things, state that:
- Public confidence requires sanctions to be proportionate to the misconduct.
- Distinctions should be drawn between negligent and deliberately deceptive conduct, and between isolated and repeated incidents.
- Sanctions should reflect whether or not the misconduct resulted in the respondent receiving benefits or investors sustaining harm.
- A respondent’s prior disciplinary history should be considered when determining sanctions.
VI. RELEVANT FACTORS
- Co-operating with an investigation is not a mitigating factor, because there is nothing voluntary or elective about it. Rather, providing the MFDA with the information it requires is a strict obligation under Section 22.1 of MFDA By-law No.1, which provides that:
- For the purpose of any examination or investigation pursuant to this By-law, [an]… Approved Person… may be required… to produce for inspection and provide copies of the books, records and accounts of such person relevant to the matters being investigated; and… to attend and give information[.]
- An Approved Person’s failure to cooperate with an investigation is an aggravating factor because it severely undermines the MFDA’s ability to fulfill its regulatory mandate. Providing full co-operation, by contrast, does no more than satisfy an explicit duty Approved Persons are required and expected to fulfill in the normal course. Similarly, the lack of investor harm is not a mitigating factor, and is relevant to sanction only in the limited sense of confirming the absence of an aggravating factor.
- The one true mitigating factor in this case is the Respondent’s admission of liability. In that regard, it is noteworthy that he conceded the substance of the misconduct in his reply to the Notice of Hearing, which is to say at the earliest juncture of these enforcement proceedings.
- In the reply, the Respondent accepted full responsibility for engaging in unapproved outside securities related business that had not been carried out for Sun Life or through its facilities. He did not accept responsibility for knowingly making a misleading statement during his Sun Life telephone interview about whether he had solicited clients. The Respondent has continued to maintain that position throughout, including in his testimony — and, indeed, Staff eventually acceded to it. This is evident in the language of the ASF, where Staff’s acceptance of the Respondent’s admission of fault for misleading the Member is explicitly predicated on his failure after the interview to verify and correct his answer.
- In short, the Respondent from the very outset has demonstrated a constructive attitude towards the disciplinary process. This has allowed this hearing to proceed in a relatively streamlined and efficient manner, with only the matter of sanction left to be resolved. Furthermore, it must be observed that the Respondent did not have the benefit of legal representation in these proceedings. As will be discussed later, these points are relevant to the question of costs.
- The other salient issue for sanction purposes is the nature of the off-book investment the Respondent was promoting.
- The ASF includes a sample of Impact’s promotional materials. These refer to the bond investment being secured by gold assets, but no details are provided regarding their value or how the assets would supposedly be secured. The materials do not otherwise address the question of risk. This is always the cardinal consideration in the assessment of any investment’s merits; and the more that projected returns exceed what is otherwise available in the market, the greater the urgency in determining the risk involved. For anyone involved in the financial industry this is, or should be, basic economic common sense.
- Impact’s promotional materials should have provoked immediate alarm in the Respondent. First, a projected total return of 7468% over seven years is so extraordinary as to defy every normal expectation of investment economics. Second, even if one accepts the assumptions underlying the projection, the final number provided is incorrect. According to Impact, an investment of USD $500,000 at the end of seven years would result in a total return of $37,840,000, or 75.68 times the original investment. This translates into a percentage return of 7568%, not 7468%. Such carelessness in a financial offering is a very bad sign, and it is all the more so when the projected returns are beyond incredible.
- In Tri-West Investment Club, the British Columbia Securities Commission found that the promotion of an investment scheme constituted regulatory fraud under section 57 of the Securities Act, R.S.B.C. 1996, c. 418. In arriving at this conclusion, the Commission in part relied upon the opinion of an expert in economics, banking, and finance:
- … Dr. Levi stated: “In my opinion, there is no possible basis for a claim that an investment can be both risk free and generate trading profits of 10 percent monthly. In fact, even by taking substantial risk, returns like this could not be made, except perhaps on a very rare lucky break when massive leverage is used.” One of the reasons he provides for reaching this conclusion is that “[f]or an investor to earn ten percent per month a borrower must pay 10 percent per month. Financial institutions are ultimately intermediaries between borrowers and lenders, so they serve to bring lenders and borrowers together. No borrower with low risk would ever be forced to face such a high cost of capital. In fact, in my opinion, borrowers willing to pay 10 percent a month are likely to be most desperate indeed. The association of this type of return with zero risk makes no sense to me at all.”
- Tri-West Investment Club, et. al. 2001 BCSECCOM 1013, at paras. 22 and 60-62.
- It is important to note that the bond investment as described in Impact’s promotional materials bears little resemblance to the Tri-West investment scheme. In particular, as already noted, the materials do not meaningfully address the question of risk, let alone claim that investing in the bond would be risk free. Nothing said here should be construed as the Hearing Panel expressing an opinion about the bond’s legitimacy. Rather, Tri-West, supra, is cited solely for its universally applicable observation that the yield promised by a debt instrument corresponds to its level of investment risk.
- The cost of borrowing money is a function of supply and demand: borrowers at low risk of defaulting are able to pay less to borrow money because lenders compete to lend it to them, while those at higher risk of defaulting are forced to pay a premium to attract any lenders at all. In short, the price a borrower is prepared to pay to borrow money is an objective measure of the risk to the lender.
- This should have been at the forefront of the Respondent’s thinking when he was offered the opportunity to promote Impact’s purported bond investment. To any reasonable person, even a brief summary of its terms should have been more than sufficient to provoke intense suspicion. This is because the bond’s projected returns were predicated on the ultimate borrower being prepared to pay an effective annual interest rate of around 1080%. That alone should have signalled to the Respondent that the bond was necessarily an extremely risky proposition.
- Section 347(2) of the Criminal Code (R.S.C., 1985, c. C-46) defines a criminal rate of interest as “an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty per cent on the credit advanced under an agreement or arrangement”. Again, the purpose of this observation is not to characterize the bond investment as criminal. The point here is to emphasize that even a cursory review of the promotional materials should have provoked the Respondent into asking Impact some very hard questions before he even considered involving himself in soliciting investors on its behalf.
- To support Staff’s sanction submission, Enforcement Counsel brought forward a number of previous MFDA sanction decisions where the substantive misconduct involved conducting securities related outside business without Member approval.
- Qi (Re), MFDA File No. 201253, November 20, 2013.
- Chang (Re), MFDA File No. 201431, December 7, 2015.
- Uy (Re), MFDA File No. 201806, June 13, 2018.
- Re: Cheung (Re), MFDA File No. 201808, January 28, 2019.
- Gomes (Re), MFDA File No. 201920, February 4, 2020.
- Bagga (Re), MFDA File No. 2019, September 23, 2020.
- The sanctions ordered in these cases included financial penalties in amounts ranging from $20,000 to $75,000, costs of between $5,000 to $9,500, and suspensions that ranged from 12 months to permanent prohibitions. All these precedents are distinguishable from the present case in important respects.
- In all of the cases, the misconduct resulted in mutual fund clients actually purchasing unapproved securities.
- The value of the off-book securities sold ranged from a high of $550,000 to a low of $40,000, with the average value being approximately $294,000.
- In four of the cases, the respondents benefitted from their misconduct by receiving referral fees or commissions.
VII. SANCTION DECISION
- The Respondent’s misconduct differs crucially from the misconduct in the sanction precedents: he was unable to persuade anyone at all to invest in Impact, let alone clients. The result was that his misconduct neither caused investor harm nor yielded any financial benefits for himself.
- The lowest financial penalties in the decisions cited by Staff were those in Qi, supra, and Bagga, supra, where in each case penalties of $20,000 were ordered. In Qi, supra, the respondents facilitated a client’s $40,000 unapproved investment in an offshore fund, which shortly thereafter was revealed to be a Ponzi scheme; after settling a claim against the respondents, the client was left with a $17,100 loss on the original investment. In Bagga, supra, the respondent received approximately $12,800 in fees for facilitating the sale of $128,000 in an unapproved syndicated mortgage investment to four individuals.
- The Respondent’s misconduct was indisputably serious. It cannot, however, be fairly regarded as equivalent to that of a respondent who causes significant actual client harm or gains financially from their misconduct. The $15,000 financial penalty proposed by Staff is a deterrent response that is proportionate to the misconduct, and the Hearing Panel ordered the Respondent to pay it.
- The Staff’s bill of costs indicates that the investigation and the conduct of these enforcement proceedings incurred total recorded costs of approximately $14,000. Those costs include the value of Enforcement Counsel’s participation for the full two days originally scheduled for the hearing, notwithstanding that the first day was limited to the submission of the ASF and the attendance of the parties was in fact quite brief.
- Moreover, the discussions that led to the ASF appear to have been less than efficient. The ASF was executed on August 8, 2021, the day before the hearing commenced. The Respondent’s admission of liability in the ASF, however, is substantively no different from what he admitted in his reply to the Notice of Hearing at the very outset of the disciplinary process. No criticism of either party is intended by this observation. Last minute resolutions are not unusual when a person does not have the benefit of legal counsel, and the Respondent was unrepresented throughout. Conversely, however, the Respondent’s admission of liability at the earliest possible juncture reflects a level of diligence and engagement that is uncommon among unrepresented respondents.
- The $5,000 in costs requested by Staff represents a significant discount from the total costs of approximately $14,000 recorded by the bill of costs. Nonetheless, it is not in the public interest to order any amount of costs against an unrepresented respondent who to all appearances has endeavored to do the right thing from the very start of litigation, and the Hearing Panel declined to do so in this case.
- Based on the description provided by Impact’s promotional materials, the purported bond offering can only be characterized as dangerously implausible. It follows that the Respondent’s promotion of the offering exposed prospective investors to a truly severe risk of harm.
- This was more than an example of extraordinarily poor judgment. The Respondent engaged in business conduct that was antithetical to the role of an Approved Person, so much so that a suspension for a period significantly longer than that requested by Staff is necessary. For that reason, the Hearing Panel ordered that the Respondent be prohibited from conducting securities related business in any capacity while in the employ of or associated with any MFDA Member for a period of five years.
Joseph A. BernardoJoseph A. BernardoChair
Holly MartellHolly MartellIndustry Representative