Settlement Agreement

I. INTRODUCTION

1. Staff of the Mutual Fund Dealers Association of Canada (“Staff”) and the Respondent, Stephen Christopher Gilbert Cragg (the “Respondent”), consent and agree to settlement of this matter by way of this agreement (the “Settlement Agreement”).
2. Staff conducted an investigation of the Respondent’s activities which disclosed activity for which the Respondent could be penalized on the exercise of the discretion of the Hearing Panel pursuant to s. 24.1 of By-law No.1.

II. JOINT SETTLEMENT RECOMMENDATION

3. Staff and the Respondent jointly recommend that the Hearing Panel accept the Settlement Agreement.
4. The Respondent admits to the following violations of the By-laws, Rules or Policies of the Mutual Fund Dealers Association of Canada (“MFDA”):
   1. commencing no later than August 23, 2005, the Respondent engaged in personal financial dealings with client LW that gave rise to a conflict or potential conflict of interest with the client which the Respondent failed to disclose to the Member or otherwise address by the exercise of responsible business judgment influenced only by the best interests of the client, contrary to the Member’s policies and procedures and MFDA Rules 1.4, 2.5.1, 1.1.2 and 2.1.1.
   2. in November 2017, the Respondent made false and misleading statements to the Member during the course of an investigation by the Member into his conduct, contrary to MFDA Rule 2.1.1.
   3. in November 2017, in response to a supervisory inquiry, the Respondent submitted a document to the Member relating to his personal financial dealings with a client, upon which the Respondent signed the client’s signature, contrary to MFDA Rule 2.1.1.
5. Staff and the Respondent agree and consent to the following terms of settlement:
   1. the Respondent shall pay a fine in the amount of $25,000 in certified funds upon acceptance of the Settlement Agreement, pursuant to s. 24.1.1(b) of MFDA By-law No. 1;
   2. the Respondent shall pay costs in the amount of $5,000 in certified funds upon acceptance of the Settlement Agreement, pursuant to s. 24.2 of MFDA By-law No. 1;
   3. the Respondent shall successfully complete the Ethics and Professional Conduct Course offered by the IFSE Institute, or an industry course acceptable to Staff of the MFDA, within 6 months of the acceptance of the Settlement Agreement, pursuant to section 24.1.1(f) of By-law No. 1;
   4. the Respondent shall in the future comply with MFDA Rules 2.1.4, 2.5.1, 1.1.2 and 2.1.1; and
   5. the Respondent will attend in person on the date set for the Settlement Hearing.
6. Staff and the Respondent agree to the settlement on the basis of the facts set out in Part III herein and consent to the making of an Order in the form attached as Schedule “A”.

III. AGREED FACTS

Registration History

7. Since April 2004, the Respondent has been registered as a mutual fund salesperson (now known as a dealing representative)^[1] with Quadrus Investment Services Ltd. (the “Member”), a Member of the MFDA.
8. At all material times, the Respondent conducted business in the areas of Pickering and Peterborough, Ontario.

The Member’s Policies and Procedures

9. Commencing in September 2006, the policies and procedures of the Member:
   1. prohibited Approved Persons from “entering into any situation that places, or appears to place, [the Approved Person] in a conflict of interest with [their] clients;”
   2. prohibited [Approved Persons] from “engaging in personal financial dealings with clients;” and
   3. prohibited “[b]orrowing from or lending to clients for any reason.”

Personal Financial Dealings

10. The Respondent and his wife, BC, were acquaintances of LW. Commencing in August 2005, LW became a client of the Member whose accounts were serviced by the Respondent. At the time of becoming a client of the Member, LW was 68 years old and retired.
11. In July 2005, prior to LW becoming a client of the Member, the Respondent and his wife, BC, provided three promissory notes (the “Promissory Notes”) to LW.
12. The Promissory Notes were signed by the Respondent, BC and LW and stated that the Respondent and BC “promise[d] to pay” $5,000 to LW under the following terms:

13. LW provided the monies to the Respondent and BC on or about the dates listed above. The monies were deposited into a joint bank account belonging to the Respondent and BC. The Respondent states that the monies were used to pay tax arrears for a company operated by BC.
14. On August 23, 2005, LW became a client of the Member.
15. Between August 2005 and December 2006, the Respondent and BC made periodic payments to LW totaling $5,000, pursuant to the Promissory Notes, as follows:

16. For each of the above listed payments, the Respondent and LW signed receipts indicating proof of payment (the “Receipts”).
17. The final Receipt, dated December 21, 2006 (the “December 21, 2006 Receipt”), was signed by the Respondent and LW, and stated that the receipt was “Payment in Full.”
18. At no time did the Respondent disclose to the Member that he: obtained monies from LW; entered into the Promissory Notes; promised to pay monies to LW, or made the payments to LW as described above.
19. On July 2, 2017, LW passed away.
20. On October 23, 2017, the executor of the estate of LW contacted the Member and requested that it confirm whether the Respondent had repaid the monies owing to LW.
21. On November 9, 2017, the Member contacted the Respondent and requested information about the status of the Promissory Notes as well as whether the Respondent had disclosed the existence of the Promissory Notes to the Member in the past.
22. In his response to the Member, the Respondent stated, among other things, that he had repaid the amounts owing to LW pursuant to the Promissory Notes.
23. The executor of the estate of LW disputed the Respondent’s claim, and asserted to the Member that the Respondent and BC had failed to repay the interest amounts owing to LW pursuant to the Promissory Notes.

The Respondent Made False and Misleading Statements to the Member and Signed a Client’s Signature on a Document Provided to the Member

24. As part of its investigation into the Respondent’s conduct, the Member requested information from the Respondent in respect of the interest amount which the executor of the estate of LW alleged remained owing.
25. On November 28, 2017, the Respondent sent an email to the Member which provided the Member with a copy of a document entitled “Notice Of Completion Of Payment In Full” (the “Notice”) which was purportedly signed by the Respondent and LW on December 28, 2006. The Notice stated:
    1. “This note is to certify that the loans and interest combined totalling $5,000.00 have been paid in full as of Thursday December 21, 2006 by [the Respondent] and [BC].
    2. I [LW] am satisfied that no other money is owed and that [the Respondent] and [BC] have satisfied their arrangements with me to pay the combined total of principle and interest that was owing to me [LW] of $5,000.00.
    3. This note is to further notify and instruct my family or any solicitor to take NO action or legal action against [BC] or [SC] for me [LW] agreeing to make a principle and interest loan in the total amount of $5,000.00 that has been paid in full”
26. In his November 28, 2017 email to the Member providing it with the Notice, the Respondent made the following statement to the Member in respect of the Notice:
    1. “Following our conversation of yesterday I did a really deep thorough search of all of my personal files and folders and finally found the attached letter/notice signed by [LW] stating that the loan and interest totaling $5,000 was paid in full. This notice was tucked in the back of an adjacent file folder. I knew in the back of my mind that [LW] had signed some sort of proof of the full payment of the interest and loans and just had to find it.”
27. The Member sent a copy of the Notice to the executor of the estate of LW who indicated that the purported signature of LW on the Notice was not LW’s signature.
28. The estate of LW obtained an independent handwriting analysis of LW’s signature which determined that the signature on the Notice was not LW’s signature. The Member presented these findings to the Respondent, who then admitted to the Member that he had signed LW’s signature on the Notice on or about November 28, 2017.
29. The Respondent’s statement in the November 28, 2017 email to the Member above at paragraph 27 was false.
30. The Respondent states that he was aware that LW had previously signed the December 21, 2006 Receipt stating that the receipt was “Payment in Full.” However, the Respondent states that, after not being able to locate the December 21, 2006 Receipt, he created the Notice in or about November 2017 in response to the Member’s inquiry, signed LW’s signature on the document, and provided it to the Member as described above in paragraphs 26 and 27.
31. At the request of the Member, the Respondent subsequently offered to pay $1,745.97 to the estate of LW representing the interest owed to LW, and the cost of the handwriting analysis incurred by the estate of LW in relation to this matter. The estate of LW has declined to accept the Respondent’s offer of payment.

Additional Factors

32. As part of its investigation, the Member issued audit letters on November 22, 2017 to clients whose accounts the Respondent serviced which requested that the clients confirm whether there was any exchange of monies between the clients and the Respondent outside of their mutual fund investments. The Member did not receive any responses which indicated that the Respondent had engaged in personal financial dealings with other clients.
33. The Respondent has not previously been the subject of MFDA disciplinary proceedings.
34. The Member imposed a 2 month suspension on the Respondent, and imposed a one year period of close supervision in respect the Respondent’s misconduct. The Respondent was reinstated from the suspension on September 18, 2017.
35. The Respondent has cooperated with the MFDA. By entering into the Settlement Agreement, the Respondent has saved the MFDA the time, resources and expenses associated with conducting a full hearing of the allegations.

IV. ADDITIONAL TERMS OF SETTLEMENT

36. This settlement is agreed upon in accordance with section 24.4 of MFDA By-law No. 1 and Rules 14 and 15 of the MFDA Rules of Procedure.
37. The Settlement Agreement is subject to acceptance by the Hearing Panel which shall be sought at a hearing (the “Settlement Hearing”). At, or following the conclusion of, the Settlement Hearing, the Hearing Panel may either accept or reject the Settlement Agreement. MFDA Settlement Hearings are typically held in the absence of the public pursuant to section 20.5 of MFDA By-law No. 1 and Rule 15.2(2) of the MFDA Rules of Procedure. If the Hearing Panel accepts the Settlement Agreement, then the proceeding will become open to the public and a copy of the decision of the Hearing Panel and the Settlement Agreement will be made available at www.mfda.ca.
38. The Settlement Agreement shall become effective and binding upon the Respondent and Staff as of the date of its acceptance by the Hearing Panel. Unless otherwise stated, any monetary penalties and costs imposed upon the Respondent are payable immediately, and any suspensions, revocations, prohibitions, conditions or other terms of the Settlement Agreement shall commence, upon the effective date of the Settlement Agreement.
39. Staff and the Respondent agree that if this Settlement Agreement is accepted by the Hearing Panel:
    1. the Settlement Agreement will constitute the entirety of the evidence to be submitted respecting the Respondent in this matter;
    2. the Respondent waives any 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;
    3. Staff will not initiate any proceeding under the By-laws of the MFDA against the Respondent in respect of the facts and contraventions described in this Settlement Agreement. Nothing in this Settlement Agreement precludes Staff from investigating or initiating proceedings in respect of any facts and contraventions that are not set out in this Settlement Agreement.  Furthermore, nothing in this Settlement Agreement shall relieve the Respondent from fulfilling any continuing regulatory obligations;
    4. the Respondent shall be deemed to have been penalized by the Hearing Panel pursuant to s. 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; and
    5. neither Staff nor the Respondent will make any public statement inconsistent with this Settlement Agreement. Nothing in this section is intended to restrict the Respondent from making full answer and defence to any civil or other proceedings against the Respondent.
40. If, for any reason, this Settlement Agreement is not accepted by the Hearing Panel, each of Staff and the Respondent will be entitled to any available proceedings, remedies and challenges, including proceeding to a disciplinary hearing pursuant to sections 20 and 24 of By-law No. 1, unaffected by the Settlement Agreement or the settlement negotiations.
41. Staff and the Respondent agree that the terms of the 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.
42. The Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement. A facsimile copy of any signature shall be effective as an original signature.

[1] In September 2009, the registration category mutual fund salesperson was changed to “dealing representative” when National Instrument 31-103 came into force.