Settlement Agreement

I. INTRODUCTION

1. The Mutual Fund Dealers Association of Canada (the “MFDA”) will announce that it proposes to hold a hearing to consider whether, pursuant to section 24.4 of By-law No. 1, a hearing panel of the Central Regional Council (the “Hearing Panel”) of the MFDA should accept the settlement agreement (the “Settlement Agreement”) entered into between Staff of the MFDA (“Staff”) and International Capital Management Inc. (“ICM”), John Paul Sanchez (“John”) and Javier Andreas Sanchez (“Javier”) (collectively referred to as the “Respondents”).

2. Individuals and entities other than Staff and the Respondents that are referred to in this Settlement Agreement including Invoice Payment Systems Inc., Energentium Inc., Caldwell Investment Management Ltd., the Caldwell ICM Market Strategy Trust Fund and Sodanol Inc. are not parties to this proceeding and have not admitted to the facts or contraventions set out in this Settlement Agreement. Such individuals and entities are not subject to the jurisdiction of the MFDA and no findings or admissions in this proceeding are binding on them.

II. JOINT SETTLEMENT RECOMMENDATION

3. Staff conducted an investigation of the activities of the Respondents. The investigation disclosed that the Respondents had engaged in activity for which the Respondents could be penalized on the exercise of the discretion of the Hearing Panel pursuant to s. 24.1 of
   MFDA By-law No.1.

4. Staff and the Respondents recommend settlement of the matters disclosed by the investigation in accordance with the terms and conditions set out below. The Respondents agree to the settlement on the basis of the facts set out in Part IV herein and consent to the making of an Order in the form attached as Schedule “A”.

5. Staff and the Respondents agree that the terms of this Settlement Agreement, including the attached Schedule “A”, will be released to the public only if and when the Settlement Agreement is accepted by the Hearing Panel.

III. ACKNOWLEDGEMENT

6. Staff and the Respondents agree with the facts set out in Part IV herein for the purposes of this Settlement Agreement only and further agree that this agreement of facts is without prejudice to the Respondents or Staff in any other proceeding of any kind including, but without limiting the generality of the foregoing, any proceedings brought by the MFDA (subject to Part IX) or any civil or other proceedings which may be brought by any other person or agency, whether or not this Settlement Agreement is accepted by the Hearing Panel..

IV. AGREED FACTS

Registration History

7. Between September 12, 1995 and October 23, 1996, ICM was registered as a limited market dealer in Ontario. Since October 23, 1996, ICM has been registered as a mutual fund dealer and limited market dealer / exempt market dealer^[1] in Ontario.

8. Since February 8, 2002, ICM has been a Member of the MFDA.

9. Since February 6, 2013, ICM has also been registered as a mutual fund dealer in Alberta.

10. After a hearing panel of the Central Regional Council issued an order in a related interim proceeding commenced pursuant to s. 24.3 of MFDA By-law No. 1 imposing requirements and restrictions on the Respondents as interim relief to address the conduct described in this Settlement Agreement (see MFDA File No. 2016107), on December 28, 2016, terms and conditions were placed on ICM’s registration prohibiting ICM from facilitating trades in securities exempt from prospectus requirements.

11. In January 2018, ICM agreed to a voluntary suspension of its membership in the MFDA as a term and condition of the approval of a sale of its client list and the transfer of its client accounts to a portfolio manager registered in the securities industry. In November 2017 and again in January 2018, the Ontario Securities Commission (the “OSC”) and the MFDA, respectively, approved the sale transaction and the transfer of client accounts from ICM to the portfolio manager.  The voluntary suspension of ICM’s membership in the MFDA took effect on April 2, 2018.  As a consequence of the voluntary suspension of ICM’s membership in the MFDA, ICM’s registration with the OSC as a mutual fund dealer was also suspended.

12. ICM is and always has been jointly owned by John and Javier who are brothers.

13. Since March 16, 1989, John has been registered in Ontario as a mutual fund salesperson (now known as a dealing representative^[2]). Since December 9, 1996, John has been registered with ICM and has been the President, a director and the primary directing mind of ICM.  From November 6, 2001 to September 28, 2009, John was registered in Ontario as an officer (trading resident) and was approved as a director of ICM.   Since December 18, 2009, John has also been the Ultimate Designated Person (“UDP”) of ICM.

14. Since February 8, 2002, John has also been an Approved Person and the designated compliance officer or Chief Compliance Officer (“CCO”) of ICM.

15. Since February 14, 2013, John has also been registered in Alberta as a mutual fund salesperson / dealing representative, officer, director, CCO and UDP of ICM.

16. Since March 17, 1994, Javier has been registered in Ontario as a mutual fund salesperson (now known as a dealing representative). Since December 9, 1996, Javier has been registered with ICM and has been Vice-President and a director of ICM.  He has been registered as an officer of ICM since January 25, 2006.

17. Since February 8, 2002, Javier has also been an Approved Person of ICM and has been designated as a branch manager and alternative CCO of ICM.

18. Since April 2, 2018, as a consequence of the voluntary suspension of its membership in the MFDA, the registration of ICM with the OSC as a mutual fund dealer and the registration of John and Javier as dealing representatives of ICM has also been suspended.

19. At all material times, the Respondents conducted business at ICM’s head office located in Toronto, Ontario.

Disciplinary History

20. On December 16, 2016, a hearing panel of the Central Regional Council of the MFDA accepted a Settlement Agreement between Staff and ICM dated December 14, 2016 (File No. 201565) in which ICM admitted that between June 2012 and September 2013, while ICM was designated in Early Warning, ICM contravened the early warning requirements set out in MFDA Rule 3.4.2 by making payments to John, Javier and two companies that John and Javier controlled without prior written approval from the MFDA. The subject matter of the December 16, 2016 settlement hearing (File No. 201565) was unrelated to the subject matter of the settlement agreement in this proceeding (File No. 201761).

21. As referenced above and in more detail below, also on December 16, 2016, pursuant to s. 24.3 of MFDA By-law No. 1, a different hearing panel of the Central Regional Council of the MFDA heard an application and issued an order requested by Staff imposing requirements and restrictions on the Respondents as interim relief to address the conduct described in this Settlement Agreement (File No. 2016107). Among other things, the order prohibited ICM and its Approved Persons including John and Javier from engaging in outside business activities without prior authorization from the MFDA or facilitating the sale of investments other than prospectus qualified mutual funds and Guaranteed Investment Certificates (“GICs”) guaranteed by the Canada Deposit Insurance Corporation.  In particular, the order prohibited the Respondents from directly or indirectly selling or facilitating investments in or loans to financially related entities including ICM, Invoice Payments Systems Corporation (“IPS”) and Energentium Inc. (“Energentium”). After the order of the MFDA hearing panel was imposed, the OSC imposed terms and conditions on ICM’s registration prohibiting ICM from selling exempt market products.

Background

ICM

22. Prior to the sale of its client list and voluntary suspension, ICM managed a total of approximately $150-185 million in assets under administration (“AUA”) consisting of a variety of investments including mutual funds, GICs and exempt market products. Many clients of ICM also purchased segregated funds and other insurance products from the dual licensed advisors who were Approved Persons of ICM (including John and Javier).  ICM serviced between 1,200 and 1,300 accounts for its clients.  It was the practice of Approved Persons of ICM (including the Respondents John and Javier) to prepare and monitor financial plans for ICM clients.

Invoice Payment Systems Corporation

23. IPS is an Ontario corporation that was incorporated on September 9, 2003. IPS is a factoring company that purchases the accounts receivable of other businesses at a discount, with the intention of collecting the full value of the accounts receivable when the accounts come due and thereby earning a profit.

24. 75% of the shares of IPS are owned by holding companies controlled by John, Javier, Javier’s wife, and other immediate family members of John and Javier. Specifically, 25% of the shares of IPS are owned by John through a holding company, 12.5% of the shares are owned by Javier through a holding company, 12.5% of the shares are owned by Javier’s wife through a holding company and 25% of the IPS shares are owned by a holding company controlled by immediate family members of John and Javier. Neither John nor Javier is an employee, officer or director of IPS but they both frequently attended and participated in meetings of the board of directors.

Energentium Inc.

25. Energentium is an Ontario corporation that was incorporated on May 31, 2012. Energentium was established as a waste management and recycling services company.

26. Since May 31, 2012, John has been the President of Energentium and has participated in the management of the company’s operations along with an immediate family member who is the general manager of Energentium.

27. The outstanding shares of Energentium are owned as follows:
    1. one third are owned by holding companies controlled by John and Javier;
    2. one third are owned by the Caldwell ICM Market Strategy Trust Fund (defined below); and
    3. one third are owned by Sodanol Inc., an arm’s length corporation.

Caldwell ICM Market Strategy Trust Fund

28. The Caldwell ICM Market Strategy Trust Fund (“Caldwell Fund”) is a mutual fund that is distributed exclusively or primarily to ICM clients. The Caldwell Fund is a non-prospectus qualified mutual fund that was distributed to unit holders as an exempt market product. The Caldwell Fund is managed by Caldwell Investment Management Ltd., an investment fund manager registered with the OSC.

29. As the primary distributors of the Caldwell Fund, John and Javier have, from time to time, influenced investment decisions made by the fund manager overseeing the Caldwell Fund regarding the content of the Caldwell Fund’s portfolio. As a result, the Caldwell Fund often invested in products recommended by John and Javier including Energentium shares and promissory notes issued by Energentium.

The Distribution of Promissory Notes by ICM Prior To 2006

30. On October 1, 2003, ICM was appointed as “the Distributor on an exclusive basis as the sole independent agent of [IPS] for the sole purpose of taking, but not accepting, orders” of promissory notes issued by IPS (the “IPS Notes”). According to the Respondents, monies that the Respondents solicited from investors in connection with the distribution of the IPS Notes were used by IPS to finance its factoring business by funding the purchase of accounts receivable.

31. Prior to June 28, 2004, ICM also distributed promissory notes for Sales Linked Finance Ltd. (“SLF”), another factoring company that was owned by Juan Sanchez, the late father of John and Javier.

32. During a compliance examination of ICM conducted by Staff in 2004 (the “2004 Compliance Examination”), Staff discovered that IPS Notes and SLF Notes appeared to have been issued to ICM clients. The IPS Notes were offered to ICM clients as an exempt product distributed through an Offering Memorandum.  Staff raised concerns with the Respondents about whether the distribution of the IPS Notes and SLF Notes was compliant with MFDA Rules and applicable securities legislation.

33. Among other things, Staff who conducted the 2004 Compliance Examination expressed the view that:
    1. it was not clear what prospectus exemption was being relied upon to offer the IPS Notes and SLF Notes to clients or whether the clients to whom the notes were offered were eligible for the exemptions relied upon;
    2. the relationship between the Member and its principals and the issuers of the IPS Notes and the SLF Notes gave rise to potential conflicts of interest that were not disclosed to clients who purchased the notes or otherwise addressed by the exercise of responsible business judgment influenced only by the best interests of the clients;
    3. the risks associated with the IPS Notes and the SLF Notes had not been adequately disclosed or explained to purchasers of the notes;
    4. the compensation that was paid to the Respondents for soliciting investors to purchase the IPS Notes and SLF Notes was not being disclosed to purchasers of the notes; and
    5. the notes did not appear to be suitable for many of the clients who purchased IPS Notes and SLF Notes as the know-your-client (“KYC”) information on file for those clients did not indicate that they had the requisite risk tolerance, investment sophistication, time horizon and/or investment objectives necessary to demonstrate the suitability of the product for their portfolio.

34. Following the 2004 Compliance Examination, the Respondents informed Staff that IPS took over the operations of SLF in 2003 and all of the notes previously issued by SLF were rolled into IPS Notes.

The 2006 Agreement and Undertaking between ICM and the MFDA

35. On October 11, 2006, ICM entered into an Agreement and Undertaking with Staff (the “Agreement and Undertaking”) in which ICM agreed to address compliance deficiencies identified during the 2004 Compliance Examination, including deficiencies with respect to the distribution of the IPS Notes, the SLF Notes and other exempt products. Pursuant to the terms of the Agreement and Undertaking, ICM agreed to, among other things:
    1. advise all clients invested in the IPS Notes, in writing, that the notes are a high-risk investment;
    2. obtain updated KYC information and re-evaluate the suitability of the investment for all clients who had invested in the IPS Notes and ensure that only clients that have an appropriate risk tolerance remain invested in the IPS Notes;
    3. recommend that clients who did not have a high risk tolerance cease to invest in the IPS Notes;
    4. refund the full amount of the original investment and any accrued interest owing to all clients who did not wish to continue to hold the IPS Notes or for whom continuing investment in the IPS Notes was unsuitable;
    5. produce a report to Staff outlining its implementation of the terms of the Agreement and Undertaking together with its October 2006 monthly financial report;
    6. provide the MFDA a written report evidencing compliance with the Agreement and Undertaking on or before December 31, 2006, including:
       1. updated KYC forms signed by its clients who invested in the IPS Notes;
       2. confirmation that all clients invested in the Notes have been advised in writing that the IPS Notes are a high-risk investment; and
       3. evidence of refunds made to clients for whom a continuing investment in the IPS Notes is unsuitable;
    7. ensure when recommending high-risk exempt products to clients:
       1. that the product is suitable for the clients based on their documented KYC information; and
       2. that the clients sign an acknowledgement indicating the following:
          1. that the product is a high-risk investment;
          2. the rate of commissions (if any) and the amount of commissions (if any) being paid to ICM; and
          3. the relationship between the Issuer of the product and ICM (if any) and the potential conflicts of interest that may arise from the relationship (if any).

36. As set out in more detail herein, between 2006 and 2016, the Respondents did not comply with the terms of the Agreement and Undertaking and did not disclose or acknowledge to Staff that the Respondents continued to distribute IPS Notes and other investments such as the Energentium Notes that were not prospectus qualified mutual funds.

Proceeding Commenced Pursuant To Section 24.3 Of MFDA By-law No. 1

37. By Notice of Application dated December 13, 2016, Staff of the MFDA commenced a preliminary proceeding for relief in exceptional circumstances pursuant to section 24.3 of MFDA By-law No. 1 to obtain orders requiring, among other things, that effective December 16, 2016:
    1. the Respondents immediately cease to engage in any form of Member business other than advising and trading with respect to prospectus qualified mutual funds and Guaranteed Investment Certificates guaranteed by the Canada Deposit Insurance Corporation and, in particular, that they cease directly or indirectly selling or facilitating investments in or loans to ICM, IPS, Energentium, John, Javier, present or former Approved Persons of ICM, close relatives of John or Javier and certain business entities in which John, Javier or their close relatives had influence or a financial interest;
    2. John and Javier cease engaging in outside activities except with respect to the sale of insurance products sold pursuant to a valid insurance license and in particular, prohibiting them from selling investments or facilitating loans in related financial entities;
    3. ICM and its Approved Persons refrain from engaging in any personal financial dealings with any client of ICM or any individual who ceased to be a client within the past 5 years;
    4. ICM cease to operate a trust account within 5 business days; and
    5. the Respondents provide to Staff or facilitate access to certain information relevant to Staff’s investigation of their conduct.

38. At a hearing held before a Hearing Panel of the Central Regional Council on December 16, 2016, Staff presented evidence in support of its application and ICM consented to terms of an order for the relief requested in Staff’s application for orders against the Respondents. By consenting to the Order, ICM dispensed with the need for a contested hearing to address the concerns raised by Staff in its application which reduced the time and resources necessary to address the application.

Contravention #1 – Securities Related Business Outside the Member

The Distribution of IPS Notes

39. Since IPS was incorporated in 2003, the Respondents have been the exclusive or primary distributors of IPS Notes.

40. Between 2006 and 2016, the Respondents sold or facilitated the sale of at least $25.8 million^[3] of investments in IPS Notes to at least 170 ICM clients.

41. The transactions relating to the distribution of IPS Notes to ICM clients were not recorded on the books and records of ICM, were not carried on for the account of ICM, and were not processed through the facilities of ICM.

42. The IPS Notes have generally been distributed subject to the following terms:
    1. arm’s length noteholders have typically, but not in all circumstances, been offered an interest rate of between 7% and 8% per year^[4], whereas non-arm’s length noteholders have typically been offered an interest rate of 10% per year;^[5]
    2. interest on the IPS Notes was payable monthly, quarterly, annually or upon maturity, depending upon the preference of the noteholder;
    3. the IPS Notes were typically issued for a one year term^[6] and could only be redeemed on the maturity date;
    4. 30 days prior to the maturity date, investors were notified of the option to redeem their principal as of the maturity date or alternatively to continue the investment for a new term. Investors were notified that if they did not communicate an intention to redeem the IPS Note prior to the maturity date, the notes would automatically be renewed for an additional one year term; and
    5. the investments in the IPS Notes were not secured by any collateral.

43. Since 2005, the Respondents have not provided written disclosure (such as a prospectus or offering memorandum) to investors before, or at the time, the investors purchased IPS Notes concerning, among other things, the risks of the investment, the manner in which the money would be used by IPS, the financial position and performance of IPS, the compensation that IPS was paying to the Respondents for soliciting investors in the IPS Notes and the non-arm’s length relationship between IPS and the Respondents.

44. Between September 2005 and February 2017, John and Javier, through holding companies they controlled, were paid commissions of 2% per year in every year that money was invested that was attributable to the distribution of IPS Notes to ICM clients. In total, during that period, holding companies controlled by John and Javier have received approximately $3 million in commission income from the solicitation of investments by ICM clients in the IPS Notes. The commissions received by holding companies controlled by John and Javier were not deducted from the interest promised to ICM clients on the IPS Notes.^[7]

45. The compensation paid by IPS to the holding companies controlled by John and Javier in connection with the distribution of the IPS Notes was not paid or credited directly to ICM and was not recorded on the books and records of ICM.

46. By engaging in the conduct described above, the Respondents acted contrary to MFDA Rules 1.1.1 and 2.1.1.

The Distribution of Energentium Notes

47. Since Energentium was incorporated in 2012, the Respondents have been the exclusive or primary distributors of promissory notes issued by Energentium (the “Energentium Notes”).

48. Between 2012 and 2016, the Respondents sold or facilitated the sale of at least $1.64 million^[8] of investments in Energentium Notes to approximately 21 ICM clients.^[9]

49. The transactions relating to the distribution of Energentium Notes to ICM clients were not recorded on the books and records of ICM, were not carried on for the account of ICM, and were not processed through the facilities of ICM.

50. As noted in paragraph 26 above, the Caldwell Fund held one third of Energentium’s outstanding shares. From time to time, the Caldwell Fund has also held Energentium Notes. As a result, unit holders of the Caldwell Fund (who were exclusively or primarily clients of ICM) were indirect investors in Energentium.

51. The Energentium Notes were generally distributed subject to the following terms:
    1. noteholders were typically offered an interest rate of between 6.5% and 9% per year that was determined by John at his discretion;
    2. interest on the Energentium Notes was payable monthly, quarterly, annually or upon maturity, depending upon the preference of the noteholder;
    3. the Energentium Notes were typically issued for a one or two year term and could only be redeemed on the maturity date;
    4. 60 days prior to the maturity date, investors were notified of the option to redeem their principal as of the maturity date, or to continue the investment for a new term. Investors were notified that unless they communicated their intention to redeem their Energentium Note prior to the maturity date, the notes would automatically be renewed for an additional term; and
    5. the investments in the Energentium Notes were not secured by any collateral.

52. No written disclosure (such as a prospectus or offering memorandum) was provided to investors before, or at the time, the investors purchased the Energentium Notes concerning, among other things, the risks of the investment, the manner in which the money would be used by Energentium, the financial position and performance of Energentium, the compensation that Energentium was paying to the Respondents for soliciting investors in the Energentium Notes and the non-arm’s length relationship between Energentium and the Respondents.

53. Interest payments owed to Energentium noteholders have not been paid out on an ongoing basis. Energentium noteholders were not informed at the time they purchased the Energentium Notes that there was a significant risk that, as a startup company, Energentium might be unable to make interest payments on a periodic basis as interest payments came due (e.g. monthly, quarterly or annually) prior to redemption of the Energentium Notes.

54. Between October 2012 and October 2013, John and Javier, through holding companies they controlled, were paid compensation attributable to the distribution of Energentium Notes to ICM clients. John and Javier received commission income totaling approximately $196,177, which is approximately 12% of the total amount of money solicited for investment in all Energentium Notes distributed during that period.

55. The compensation paid by Energentium to the Respondents in connection with the distribution of the IPS Notes was not paid or credited directly to ICM and was not recorded on the books and records of ICM.

56. By engaging in the conduct described above, the Respondents acted contrary to MFDA Rules 1.1.1 and 2.1.1.

Contravention #2 – Undisclosed Outside Business Activities

57. Between 2006 and 2016, John did not disclose on Forms 33-109F4 that were filed with the OSC his role in efforts of IPS to raise capital by soliciting purchasers of promissory notes issued by IPS to finance the operations of IPS or the fact that he was earning compensation from his activities in this role.

58. Between 2012 and 2016, John also did not disclose on Forms 33-109F4 that were filed with the OSC his role as President of Energentium and as a director of Energentium and his role in efforts of Energentium to raise capital by soliciting purchasers of promissory notes issued by Energentium to finance the operations of Energentium.

59. Between 2006 and 2016, Javier did not disclose his role in efforts of IPS and Energentium to raise capital by soliciting purchasers of promissory notes on Forms 33-109F4 that were filed with the OSC.

60. The Respondents did not otherwise disclose the involvement of John and Javier with the business activities of IPS or Energentium to Staff.

61. The Respondents also did not document written approval from ICM of John’s and Javier’s business activities relating to IPS or Energentium on the books and records of ICM, or stipulate any terms and conditions with respect to the approval of any engagement by John or Javier in such outside activities, contrary to MFDA Rule 1.3.2(c).

62. The Respondents did not provide written disclosure to clients of ICM who were solicited to invest in IPS and Energentium to ensure that clients understood that these investments were not being processed through ICM, contrary to MFDA Rule 1.3.2(e).

63. By virtue of the foregoing, John and Javier engaged in outside activities in contravention of MFDA Rule 1.3.

Contravention #3 – Conflicts of Interest

64. John and Javier have a non-arm’s length relationship with both IPS and Energentium as John, Javier and members of their families are substantial shareholders in both companies (either directly or through holding companies that they own and control) and John has been the President and has served as a director of Energentium since May 31, 2012.

65. Between 2003 and 2016, the Respondents solicited investments in IPS and Energentium by ICM clients, which gave rise to conflicts of interest which the Respondents failed to address by the exercise of responsible business judgment influenced only by the best interests of ICM clients.

66. The conflicts of interest were exacerbated because the Respondents:
    1. did not record the transactions concerning the investments by ICM clients in IPS Notes and Energentium Notes on the books and records of ICM;
    2. did not provide ICM clients with any written disclosure (including any financial disclosure) about either IPS or Energentium;
    3. did not provide disclosure in writing about the amount of compensation that they were receiving for soliciting money for investment in IPS and Energentium;
    4. determined rates of return that they were prepared to offer to ICM clients at their own discretion and whereas the promissory notes issued to clients of ICM typically but not in all circumstances promised an interest rate of 7-8% per year, the promissory notes that were issued to non-arm’s length investors including the Respondents, their family members, corporations that they controlled and business associates were promised an interest rate of 10% per year;^[10]
    5. described the IPS Notes and Energentium Notes as “secured” investments which was false; and
    6. did not provide written disclosure to ICM clients about their non-arm’s length relationship with IPS and Energentium including their ownership interests in both companies.

67. Examples of significant facts that the Respondents did not disclose to clients who were solicited to invest in IPS Notes include the following:
    1. holding companies owned and controlled by John, Javier and their family members owned or controlled the majority of the outstanding common shares of IPS;
    2. the IPS Notes were unsecured;
    3. the risk associated with IPS’s substantial liability to noteholders as well as the risk attributable to the fact that IPS may be unable to collect on all of its outstanding accounts receivable; and
    4. IPS extended unsecured loans and advances to related parties including a substantial amount that is due from a company owned by John and Javier.

68. Examples of significant facts that the Respondents did not disclose to clients who were solicited to invest in the Energentium Notes include the following:
    1. John was the President of Energentium and an immediate family member was appointed as the general manager of Energentium;
    2. holding companies owned by John and Javier owned 33% of the outstanding common shares of Energentium through holding companies that they owned or controlled;
    3. the Energentium Notes were unsecured;
    4. Energentium lacked sufficient cash flow to pay interest to noteholders as it came due;
    5. between 2013 and 2015, Energentium incurred losses in excess of $700,000 per year; and
    6. as of May 31, 2016, Energentium’s liabilities included, in addition to the $1.7 million that Energentium owed to noteholders, more than $1 million owed on a mortgage obtained from an institutional lender and more than $1.2 million in outstanding shareholder loans.

69. By soliciting money from ICM clients for investment in IPS and Energentium, the Respondents engaged in conduct that gave rise to conflicts of interest, which were not addressed by the exercise of responsible business judgment influenced only by the best interests of the clients, contrary to MFDA Rules 2.1.4 and 2.1.1.

Contravention #4 – Suitability

70. Between 2006 and 2016, prior to recommending and distributing IPS Notes and Energentium Notes to approximately 170 ICM clients, the Respondents did not conduct sufficient due diligence on the products to fulfill their suitability obligations to “know your product” (“KYP”) and did not maintain sufficient records to demonstrate that they had complied with their suitability obligations to “know-your-client” (“KYC”) and to ensure that the products recommended were suitable for the clients to whom the products were recommended. In particular, the Respondents did not:
    1. determine whether the notes were eligible for sale without a prospectus and if so, what exemptions from prospectus requirements would be applicable;
    2. ensure that evidence was obtained from each client to whom the notes were offered to demonstrate their eligibility for any exemptions relied upon;
    3. document criteria or limitations with respect to the types of clients to whom the investments should be offered having regard to the relevant KYC information such as risk tolerance, time horizon, investment objectives, net worth, income, and investment knowledge; and
    4. identify the risks associated with the products and ensure that those risks were appropriately documented and disclosed to clients.

71. When the Respondents recommended and distributed the IPS Notes and Energentium Notes to ICM clients, they also did not sufficiently document and record KYC information for clients to ensure that the IPS Notes and the Energentium Notes were suitable for the clients to whom the notes were sold and they did not sufficiently explain the risks, material assumptions and features of the IPS Notes and the Energentium Notes, contrary to MFDA Rule 2.2.1.

Contravention #5 – Breach of an Agreement and Undertaking with the MFDA

72. As set out at paragraph 34 above, the Respondents entered into the Agreement and Undertaking with Staff on October 11, 2006, in order to address compliance deficiencies that had been identified by Staff during the 2004 Compliance Examination.

73. Between 2006 and 2016, the Respondents contravened the terms of the Agreement and Undertaking by, among other things, failing to:
    1. record KYC information for ICM clients who invested in the IPS Notes and Energentium Notes on the books and records of ICM, in order to ensure that the products were suitable for those clients; and
    2. obtain signed acknowledgements from ICM clients indicating that clients were aware:
       1. that IPS Notes and Energentium Notes were high risk investments;
       2. of the amount and rate of compensation that the Respondents were receiving for soliciting money for investment in the IPS Notes and Energentium Notes; and
       3. the relationship between the Respondents, and IPS or Energentium, including their ownership stake in IPS and Energentium and John’s management role with Energentium and disclosure of any potential conflicts of interest arising from the non-arm’s length nature of the relationship between the Respondents and IPS or Energentium.

Allegation #6 – Failure to Cooperate with Staff of the MFDA

A) Inaccurate Or Misleading Statements to MFDA Compliance Staff

74. Between 2006 and 2016, the Respondents provided the following inaccurate statements to MFDA Compliance Staff:
    1. between 2006 and 2016, the Respondents submitted nine (9) responses to annual Membership Questionnaires to the MFDA in which the Respondents were required to disclose, among other things, the value of ICM’s AUA for the previous year, the types of investments held by clients of the Member and the amount (in dollar value) of each investment type sold. The Respondents did not disclose the sale of IPS Notes in any of the nine (9) responses to the Membership Questionnaires^[11];
    2. between 2012 and 2016, the Respondents submitted Membership Questionnaires to the MFDA in which the Respondents did not disclose the sale of Energentium Notes; and
    3. during compliance examinations conducted at ICM’s office in 2009, 2012 and 2015, John and Javier participated in interviews with Staff during which they:
       1. were asked about the full range of products that they offered through ICM, outside of the Member, and through referral arrangements with third parties and did not disclose their roles, relationships or activities in respect of IPS or Energentium or their efforts to solicit investments by ICM clients in IPS Notes or Energentium Notes; and
       2. stated that they were not engaged in any outside activities.

75. At all material times, the Respondents knew or ought to have known that by omitting reference to their involvement in the operations of IPS and Energentium and the sale of IPS Notes and Energentium Notes to ICM clients in their responses to MFDA Compliance Staff, they were providing inaccurate or misleading statements to the MFDA.

B) Inaccurate or Misleading Statements to MFDA Enforcement Staff

76. In April 2011, in response to inquiries from MFDA Enforcement Staff about the extent of their continuing involvement with IPS, the Respondents denied that they had an existing relationship with IPS, and denied that they were receiving compensation in connection with the distribution of IPS Notes.

77. John and Javier also provided inaccurate statements to MFDA Enforcement Staff during interviews conducted on November 18, 2016 including the following:
    1. the IPS Notes and Energentium Notes were secured by collateral;
    2. Javier stated that ICM clients who purchased IPS Notes were provided with a disclosure letter informing them that:
       1. IPS was a high risk investment;
       2. the Respondents had a non-arm’s length relationship with IPS; and
       3. the Respondents received compensation for soliciting money for the purchase of IPS Notes;
    3. John stated that ICM clients who purchased Energentium Notes were provided with a disclosure letter informing them that:
       1. the Respondents had a non-arm’s length relationship with Energentium; and
       2. the Respondents received compensation for soliciting money for the purchase of Energentium Notes; and
    4. John substantially understated the extent of the losses that Energentium was generating on a monthly and annual basis.

78. At all material times, the Respondents knew or ought to have known that the statements that they provided in response to questioning by MFDA Enforcement Staff were inaccurate or misleading.

C) Withholding of Emails During On-Site Inspection by Staff

79. On November 15, 2016, after receiving reports that the Respondents had been soliciting investments in IPS Notes and Energentium Notes from clients of ICM, contrary to reports submitted to MFDA Compliance Staff and statements made and submitted to MFDA Enforcement Staff, Staff attended at the office of ICM to conduct an on-site inspection to investigate whether the Respondents were engaged in undisclosed securities related business that had not been recorded on the books and records of ICM. Staff retained a third party forensic digital technology expert firm to participate in the on-site inspection and copy ICM’s electronic records in order to facilitate Staff’s investigation.

80. Staff arrived at the office of ICM shortly after 9:00 a.m., and informed the Respondents that, among other things, Staff required access to John’s and Javier’s computers in order to copy their computer hard drives. Between 9:00 a.m. and 12:30 p.m., the Respondents refused to facilitate access to John’s and Javier’s computers while they sought legal advice concerning Staff’s request.

81. Unbeknownst to Staff at the time, the Respondents were simultaneously taking steps to remove certain electronic records of ICM prior to authorizing the imaging of those records by the forensic digital technology expert retained by Staff.

82. Prior to the imaging of the computer hard drives of John and Javier, approximately 30 gigabytes of electronic data was removed including the archives of all e-mails that the Respondents sent and received between 2009 and 2015 and electronic records associated with the involvement of John and Javier with IPS and Energentium and their communication with clients of ICM to solicit investments in IPS Notes and in Energentium Notes.

83. On November 15, 2016, the Respondents did not inform Staff that electronic data had been removed from the hard drives prior to the imaging process. However, the forensic digital technology expert retained by Staff discovered during his analysis of the data that a substantial amount of data was removed prior to the imaging process.  After Staff informed counsel for the Respondents that Staff had discovered that data had been removed prior to the imaging process, the Respondents acknowledged that they had removed the missing electronic data.

84. After the Respondents admitted to Staff that data had been removed from the hard drives of John and Javier, the Respondents told Staff that they would restore the electronic data that they had removed and would allow the forensic digital technology expert retained by Staff to return to re-image the hard drives. On December 1, 2016, the forensic digital technology expert returned to the office of ICM to repeat the imaging process.

85. By providing inaccurate and misleading statements to the MFDA and by withholding records relevant to matters under investigation at the time those records were requested, the Respondents failed to cooperate with Staff’s investigation into their conduct, contrary to sections 22.1 and 22.2 of MFDA By-law No. 1.

Contravention #7 – Repeat Trade Supervision Deficiencies

86. In the first quarter of 2012, Staff conducted a compliance examination of ICM, in order to assess the Respondents’ compliance with MFDA Rules, By-laws and Policies (the “2012 Compliance Examination”). The period under examination was from February 1, 2009 to January 31, 2012. The results of the 2012 Compliance Examination were summarized and delivered to the Respondents in a report dated July 27, 2012 (the “2012 Compliance Examination Report”).

87. The 2012 Compliance Examination listed, among other things, the following deficiencies:
    1. ICM supervisory staff did not maintain evidence of trade inquiries, responses received and resolutions achieved; and
    2. ICM had not implemented adequate procedures to identify or detect trading trends or patterns of concern, in accordance with MFDA Policy No. 2. Specifically, the following reviews were not being conducted:
       1. accounts generating commissions greater than $1,500 within the month;
       2. AUA reports on a quarterly basis comparing current AUA to AUA at the same time the prior year; and
       3. commission reports on a quarterly basis for the previous twelve-month period comparing them to the same period the prior year.

88. In their response to Staff regarding the reported deficiencies dated August 27, 2012, the Respondents informed Staff that commencing no later than December 31, 2012, they would:
    1. implement the use of an electronic module available through ICM’s back office system that was designed to facilitate trade review and the creation and retention of records of the supervision and approval of daily trading, the opening of new accounts and the recording of KYC updates;
    2. implement the use of a compliance email account in order to document compliance inquiries and follow up, and to retain records of trade supervision queries on ICM’s back office system; and
    3. implement the creation and review of reports to identify all accounts generating commissions greater than $1,500 within the month; quarterly commissions; and, quarterly AUA reports.

89. In the first quarter of 2015, Staff conducted a follow up compliance examination of ICM, covering the period from February 1, 2012 to November 30, 2014, in order to assess the Respondents’ compliance with MFDA Rules, By-laws and Policies (the “2015 Compliance Examination”). The results of the 2015 Compliance Examination were summarized and delivered to the Respondents in a report dated May 28, 2015 (the “2015 Compliance Examination Report”).

90. The 2015 Compliance Examination Report identified, among other things, the following repeat deficiencies that had previously been identified in the 2012 Compliance Examination Report:
    1. the Respondents did not maintain adequate records of trade supervision such as evidence of trade inquiries, responses received and resolutions achieved; and
    2. ICM had not implemented adequate procedures to identify or detect trading trends or patterns of concern, in accordance with MFDA Policy No. 2 with respect to:
       1. accounts generating commissions greater than $1,500 within the month;
       2. AUA reports on a quarterly basis comparing current AUA to AUA at the same time the prior year; and
       3. commission reports on a quarterly basis for the previous twelve-month period comparing them to the same period the prior year.

91. Contrary to their representations to Staff on August 27, 2012, the Respondents:
    1. had not implemented the use of an electronic module on their back office system to facilitate trade review and the creation and retention of records of the supervision and approval of daily trading, the opening of new accounts and the recording of KYC updates;
    2. did not maintain sufficient evidence of compliance queries and follow up including trade queries; and
    3. did not implement the use of trend reports to detect concerning changes in trading patterns, commission spikes or significant changes in AUA, as required by MFDA Policy No. 2.

92. By virtue of the foregoing, between February 1, 2009 and May 28, 2015, the Respondents did not establish, implement and maintain policies and procedures which ensured adequate trade supervision in accordance with MFDA Policy No. 2, contrary to representations that were made to Staff at the conclusion of the 2012 Compliance Examination, and to MFDA Rules 2.5.1, 2.5.7, and MFDA Policy No. 2.

Present Status

93. On November 16, 2016, after Staff discovered the existence of the outstanding IPS Notes and Energentium Notes, Staff designated ICM in early warning on discretionary grounds pursuant to MFDA Rule 3.4.2(a)(v). Consequently, from that date, ICM was subject to early warning requirements specified in Rule 3.4.2(b) and early warning restrictions imposed pursuant to Rule 3.4.3. Pursuant to early warning requirements set out in Rule 3.4.2(b)(iv)(C), ICM was not permitted to make direct or indirect payments to its officers, directors and shareholders including John and Javier. Accordingly, John and Javier have not received income from ICM since that time.

94. On November 18, 2016, John and Javier were both independently interviewed by MFDA Counsel and Staff, and further to undertakings given at their respective interviews, the Respondents produced substantial amounts of information including financial information relating to IPS and Energentium and the role of the Respondents in connection with those companies.

95. The Respondents state that in compliance with the December 16, 2016 order of a hearing panel of the Central Regional Council (the “December 16, 2016 Order”), since that date, the Respondents have discontinued their involvement with the operations and solicitation of investments in IPS and Energentium except for efforts undertaken to facilitate the sale of property owned by Energentium in order to repay amounts borrowed from creditors including Energentium noteholders. Further, the Respondents have cooperated with Staff, including by producing all requested documentation.

IPS

96. Since December 2016, IPS has continued its practice of renewing promissory notes that it has issued to investors including former clients of ICM.

97. The Respondents state that:
    1. IPS has not defaulted on requests by investors to redeem their notes or to receive interest that is due; and
    2. in compliance with the December 16, 2016 Order, the Respondents no longer provide advice to investors about IPS promissory notes. Instead, since December 16, 2016, the Respondents refer investors to the President of IPS, to answer any questions that investors have concerning their investments in IPS and to  renew their investments in IPS.

98. Since December 2016, the Respondents have prepared “acknowledgement” documents that they have asked investors in IPS Notes to sign and that investors have signed that state that:
    1. “There are no costs to you associated with the loan. However, a 2% finder’s fee is paid by IPS to your Financial Advisor upon the issuance of a note”;
    2. “This loan is considered high risk, but upon maturity you have the option of redeeming or renewing the note.”
    3. “Invoice Payment System is a related entity of International Capital Management Inc. Financial advisors that are shareholders of Invoice Payment System, including myself, may stand to benefit from the inflow of client money into IPS. Being a shareholder, however, provides advisors like me with input to the management of IPS.  This ownership provides a means of supervision and control over how you are treated and how your money is managed.”

99. The “acknowledgement” documents that were prepared by the Respondents and signed by investors in IPS since December 2016 were not reviewed or approved by the MFDA or any other securities regulator.

100. To date, the MFDA has not received any complaints asserting that investors in IPS have been denied repayment of the principal amounts that they invested in IPS or interest that they were promised.

Energentium

101. On November 18, 2016, John and Javier attended interviews with Staff during the investigation of this matter. As noted in paragraph 76 above, during the interview, John and Javier inaccurately stated that promissory notes issued by Energentium were secured by real estate collateral owned by Energentium.

102. On November 24, 2016, following the interview, John and Javier registered a charge in the amount of $1,536,666.85 on title of a real estate property owned by Energentium that identified Javier as the chargee and stated that Javier as chargee “acknowledges that he holds this charge as trustee on behalf of the promissory note holders listed in Schedule ‘A’ to this charge.” Schedule “A” to the charge listed the individuals who held outstanding Energentium Notes on that date.  According to the records of Energentium and the Respondents, the value of the charge on the property corresponded to the principal amount (without interest) that noteholders had invested in Energentium between August 2012 and October 2013 that had not yet been repaid to the noteholders.^[12]

103. After December 2016, Energentium ceased to operate as a going concern. At approximately that time, John and Javier commenced efforts to try to sell the factory premises that Energentium owned and previously operated.  This was the real estate property that the charge referenced in paragraph 102 above was registered against.

104. On February 8, 2018, the property was sold. The proceeds from the sale were sufficient to repay all amounts owed to the institutional lender that held a mortgage on the property and to repay Energentium noteholders the principal amounts that they had invested in Energentium.  Energentium noteholders did not receive any of the interest that was promised when their initial investments were made.  The Energentium noteholders executed full and final releases acknowledging receipt of their principal and releasing their claims to any further amounts owed.

105. The shareholders of Energentium (including holding companies controlled by John and Javier) retained $103,690.31 from the sale of the property which constituted the net proceeds after the mortgagee was paid its principal, interest, penalty interest and a discharge fee and note holders were repaid the principal amounts that they had invested as evidenced by Energentium Notes and recorded on the charge that was registered against the property in November 2016.

106. The Respondents state that John, Javier, and companies owned by them directed substantial effort and incurred substantial expenses (that exceeded the amount that they retained from the sale of the property) that they do not expect to recover to maintain the property owned by Energentium, facilitate the sale of the property and successfully wind up the operations of the business.

ICM

107. On July 20, 2017, the MFDA issued Bulletin 0727M indicating that Staff had received notification from ICM of its intention to resign from membership in the MFDA. ICM informed Staff at that time that it had entered into an agreement with another registrant in the securities industry (the “Purchaser”) that contemplated the sale and transfer of the client accounts (but not any investments held by clients of ICM in IPS or Energentium) that had previously been serviced by Approved Persons of ICM to the Purchaser (the “ICM Sale Transaction”) as previously described in paragraph 10 above.

108. In November 2017 and again in January 2018, the OSC and the MFDA, respectively, provided regulatory approval of the ICM Sale Transaction subject to certain terms and conditions.

109. In compliance with one of the terms and conditions of the approval of the ICM Sale Transaction, effective April 2, 2018, the Respondents agreed to the voluntary suspension of ICM’s membership in the MFDA. As a result of the suspension of its membership in the MFDA, ICM’s registration with the OSC as a mutual fund dealer was suspended and the registration of John and Javier as dealing representatives of the suspended dealer was suspended.  Accordingly, each of the Respondents is presently suspended from conducting securities related business.

V. CONTRAVENTIONS

110. The Respondents admit that between 2006 and 2016, the Respondents engaged in securities related business that was not carried on for the account of ICM, through the facilities of ICM or recorded on the books and records of ICM by:
     1. selling or facilitating the sale of at least $25.8 million of investments in a non-arm’s length company to at least 170 ICM clients; and
     2. selling or facilitating the sale of at least $1.64 million of investments in a non-arm’s length company to 21 ICM clients;

     contrary to MFDA Rules 1.1.1 and 2.1.1.

111. The Respondents admit that since 2006, John and Javier have engaged in outside activities that were not approved by ICM in writing or reflected on the books and records of ICM, contrary to MFDA Rule 1.3.2(c)^[13].

112. The Respondents admit that since 2006, John and Javier solicited at least $27.44 million from ICM clients for investment in two non-arm’s length companies, thereby engaging in conduct that gave rise to conflicts of interest which the Respondents failed to address by the exercise of responsible business judgment influenced only by the best interests of the clients, contrary to MFDA Rules 2.1.4 and 2.1.1.

113. The Respondents admit that between 2006 and 2016, the Respondents recommended that at least 170 ICM clients purchase investments distributed by two non-arm’s length companies, without conducting adequate due diligence to know the products and did not maintain sufficient records to demonstrate that they complied with the obligation to Know-Your-Client (“KYC”) and ensure that the products recommended and the orders obtained from clients were suitable, contrary to MFDA Rule 2.2.1^[14].

114. The Respondents admit that after October 2006, the Respondents did not comply with the terms of an Agreement and Undertaking entered into between the Respondents and Staff, thereby engaging in conduct contrary to MFDA Rule 2.1.1 and engaging the authority of the Hearing Panel to impose a penalty on the Respondents pursuant to sections 24.1.1 and 24.1.2 of MFDA By-law No. 1.

115. The Respondents admit that between 2008 and December 2016, the Respondents failed to cooperate with Staff’s investigations into their conduct by providing inaccurate or misleading information and statements to Staff and withholding information about some of their business activities in response to questioning by MFDA compliance staff and by MFDA enforcement staff during investigations of their conduct, and by initially withholding access to electronic records including emails stored on ICM’s systems during an on-site inspection of ICM’s office conducted by Staff on November 15, 2016, contrary to sections 22.1 and 22.2 of MFDA By-law No. 1.

116. The Respondents admit that since February 2009, the Respondents have not:
     1. established, implemented and maintained policies and procedures required to ensure adequate head office account supervision;
     2. maintained adequate records of trade supervision that was conducted including inquiries made, responses received from Approved Persons and resolutions achieved as a result of supervisory inquiries; and
     3. established, implemented and maintained adequate policies and procedures to ensure the identification of trends in trading activity,

     contrary to MFDA Rules 2.5.1 and 2.5.7, and MFDA Policy No. 2.

VI. TERMS OF SETTLEMENT

117. The Respondents agree to the following terms of settlement:
     1. the Respondent John Paul Sanchez shall be permanently prohibited from conducting securities related business while in the employ of, or associated with, any Member of the MFDA;
     2. the Respondent Javier Andreas Sanchez shall be permanently prohibited from conducting securities related business while in the employ of, or associated with, any Member of the MFDA;
     3. the Respondent John Paul Sanchez shall pay a fine in the amount of $100,000;
     4. the Respondent Javier Andreas Sanchez shall pay a fine in the amount of $50,000;
     5. the Respondents John Paul Sanchez and Javier Andreas Sanchez shall jointly pay costs in the amount of $25,000 on the date this this Settlement Agreement is accepted by a Hearing Panel of the MFDA;
     6. the membership in the MFDA of the Respondent ICM shall be terminated effective on the date that this Settlement Agreement is accepted by Hearing Panel of the MFDA and thereafter ICM shall cease to have any of the rights and privileges of Membership in the MFDA;
     7. the Respondents John Paul Sanchez and Javier Andreas Sanchez will attend the Settlement Hearing in person.

118. John Paul Sanchez shall pay $30,000 of his $100,000 fine on the date that this Settlement Agreement is accepted by a Hearing Panel of the MFDA and shall pay the balance in equal installments of $5,833.33 payable on the first day of each of month between August 1, 2018 and July 1, 2019.

119. Javier Andreas Sanchez shall pay $20,000 of his $50,000 fine on the date that this Settlement Agreement is accepted by a Hearing Panel of the MFDA and shall pay the balance in equal installments of $2,500 payable on the first day of each month between August 1, 2018 and July 1, 2019.

VII. STAFF COMMITMENT

120. If this Settlement Agreement is accepted by the Hearing Panel, Staff will not initiate any proceeding under the By-laws of the MFDA against the Respondents or against any other officer or director or former officer or former director of ICM in respect of the facts set out in Part IV and the contraventions described in Part V of this Settlement Agreement, subject to the provisions of Part IX below. Nothing in this Settlement Agreement precludes Staff from investigating or initiating proceedings in respect of any facts or contraventions that are not set out in Parts IV and V of this Settlement Agreement or in respect of conduct that occurred outside the specified date ranges of the facts and contraventions referenced in Parts IV and V, whether known or unknown at the time of settlement. Furthermore, nothing in this Settlement Agreement shall relieve the Respondents from fulfilling any continuing regulatory obligations including the obligation to resolve any complaints that have been received or may be received in the future concerning the business of ICM.

VIII. PROCEDURE FOR APPROVAL OF SETTLEMENT

121. Acceptance of this Settlement Agreement shall be sought at a hearing of the Central Regional Council of the MFDA on a date agreed to by counsel for Staff and the Respondents.

122. Staff and the Respondents may refer to any part, or all, of the Settlement Agreement at the settlement hearing. Staff and the Respondents also agree that if this Settlement Agreement is accepted by the Hearing Panel, it will constitute the entirety of the evidence to be submitted respecting the Respondents in this matter, and the Respondents agree to waive their rights to a full hearing, a review hearing before the Board of Directors of the MFDA or any securities commission with jurisdiction in the matter under its enabling legislation, or a judicial review or appeal of the matter before any court of competent jurisdiction.

123. Staff and the Respondents agree that if this Settlement Agreement is accepted by the Hearing Panel, then the Respondents shall be deemed to have been penalized by the Hearing Panel pursuant to sections 24.1.1 and 24.1.2 of By-law No. 1 for the purpose of giving notice to the public thereof in accordance with s. 24.5 of By-law No. 1.

124. Staff and the Respondents agree that if this Settlement Agreement is accepted by the Hearing Panel, neither Staff nor the Respondents will make any public statement inconsistent with this Settlement Agreement. Nothing in this section is intended to restrict the Respondents from making full answer and defence to any civil or other proceedings against them.

IX. Failure to honour Settlement Agreement

125. If this Settlement Agreement is accepted by the Hearing Panel and, at any subsequent time, the Respondents fail to honour any of the Terms of Settlement set out herein, Staff reserves the right to bring proceedings under section 24.3 of the By-laws of the MFDA against any or all of the Respondents based on, but not limited to, the facts set out in Part IV of the Settlement Agreement, as well as the breach of the Settlement Agreement. If such additional enforcement action is taken, the Respondents agree that the proceeding(s) may be heard and determined by a hearing panel comprised of all or some of the same members of the hearing panel that accepted the Settlement Agreement, if available.

X. NON-ACCEPTANCE OF SETTLEMENT AGREEMENT

126. If, for any reason whatsoever, this Settlement Agreement is not accepted by the Hearing Panel or an Order in the form attached as Schedule “A” is not made by the Hearing Panel, each of Staff and the Respondents will be entitled to any available proceedings, remedies and challenges, including proceeding to a disciplinary hearing pursuant to sections 20 and 24 of
     MFDA By-law No. 1, unaffected by this Settlement Agreement or the settlement negotiations.

127. Whether or not this Settlement Agreement is accepted by the Hearing Panel, the Respondents agree that they will not, in any proceeding, refer to or rely upon this Settlement Agreement or the negotiation or process of approval of this Settlement Agreement as the basis for any allegation against the MFDA of lack of jurisdiction, bias, appearance of bias, unfairness, or any other remedy or challenge that may otherwise be available.

XI. DISCLOSURE OF AGREEMENT

128. The terms of this Settlement Agreement will be treated as confidential by the parties hereto until accepted by the Hearing Panel, and forever if, for any reason whatsoever, this Settlement Agreement is not accepted by the Hearing Panel, except with the written consent of the Respondents and Staff or as may be required by law.

129. Any obligations of confidentiality shall terminate upon acceptance of this Settlement Agreement by the Hearing Panel.

XII. EXECUTION OF SETTLEMENT AGREEMENT

130. This Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement.

131. A facsimile copy of any signature shall be effective as an original signature.

1. [1] On September 28, 2009, with the implementation of National Instrument 31-203, the Limited Market Dealer registration category in Ontario was changed to Exempt Market Dealer.
2. [2] In September 2009, National Instrument 31-203 changed the registration category “mutual fund salesperson” to “dealing representative”.
3. [3] Not including interest payable.
4. [4] In a few cases, arm’s length noteholders may have been offered 10% per year.
5. [5] The Respondents state that the reason that non-arm’s length noteholders have typically been offered a higher interest rate than arm’s length noteholders is that the Respondents have not been paid commissions for soliciting the investments of non-arm’s length noteholders.  Such commission amounts were otherwise deducted from the interest rate offered to noteholders by the Respondents.  The Respondents acknowledge that this was not disclosed to arm’s length noteholders.
6. [6] Since 2006, IPS Notes have been issued for a one year term.  Prior to 2006, IPS Notes were issued for terms ranging in duration from 1 to 5 years.
7. [7] In other words, if clients were promised an interest rate of 7%, the amount of interest payable to the clients was 7% not 5% – the interest payable was not reduced by the amount of the 2% commission that was paid annually to the Approved Person of ICM who solicited the investment. 
8. [8] Not including interest payable.
9. [9] The Respondents also solicited the investment of money in Energentium Notes by the Caldwell Fund.  The value of the Energentium Notes purchased by the Caldwell Fund totaled at least $650,000 which has not been included in $1.64 million investment by 21 former ICM Clients in Energentium Notes.
10. [10] See note 5 above.
11. [11] The Respondents had disclosed in ICM’s 2005 response to a Membership Questionnaire that holdings of IPS Notes comprised part of ICM’s AUA and that the promissory notes that had been issued were an example of a type of investment sold by ICM.
12. [12] Two former Energentium noteholders had previously redeemed investments of approximately $50,000 each.
13. [13] Formerly MFDA Rule 1.2.1(c) and before that Rule 1.2.1(d)
14. [14] MFDA Rule 2.2.1 was amended in December 2010 and in February 2013.  In this Settlement Agreement, all references to the MFDA Rule 2.2.1 concern the version of the Rule that was in force prior to December 2010.