IN THE MATTER OF A DISCIPLINARY HEARING PURSUANT TO SECTIONS 20 AND 24 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

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1 Notice of Hearing File No IN THE MATTER OF A DISCIPLINARY HEARING PURSUANT TO SECTIONS 20 AND 24 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA Re: Patrick Cronin NOTICE OF HEARING NOTICE is hereby given that a first appearance will take place by teleconference before a hearing panel of the Central Regional Council (the Hearing Panel ) of the Mutual Fund Dealers Association of Canada (the MFDA ) in the hearing room located at 121 King Street West, Suite 1000, Toronto, Ontario on July 10, 2014 at 10:00 a.m. (Eastern), or as soon thereafter as the appearance can be held, concerning a disciplinary proceeding commenced by the MFDA against Patrick Cronin (the Respondent ). The Hearing on the Merits will take place in Toronto, Ontario. DATED this 22 nd day of May, Rohit Kumar Rohit Kumar Director of Regional Councils Mutual Fund Dealers Association of Canada 121 King Street West, Suite 1000 Toronto, Ontario M5H 3T9 Telephone: Facsimile: corporatesecretary@mfda.ca Page 1 of 12

2 NOTICE is further given that the MFDA alleges the following violation of the By-laws, Rules or Policies of the MFDA: Allegation #1: Between January 11, 2002 and November 8, 2011, the Respondent had and continued in another gainful occupation that was not disclosed to and approved by the two Members with which he was registered in succession by arranging private loans and mortgages for third party borrowers and lenders, which included borrowing from clients, contrary to MFDA Rules 1.2.1(c) 1 and Allegation #2: Commencing March 2011, the Respondent engaged in personal financial dealings with client SH by borrowing $43,000 from her as part of a total amount of $728,000 borrowed by the Respondent and secured by a private mortgage on a property owned by the Respondent, thereby giving rise to a conflict or potential conflict of interest between the Respondent and client SH which the Respondent failed to address by the exercise of responsible business judgment influenced only by the best interests of client SH, contrary to MFDA Rules and PARTICULARS NOTICE is further given that the following is a summary of the facts alleged and intended to be relied upon by the MFDA at the hearing: Registration History 1. From February 1997 to November 14, 2006, the Respondent was registered in Ontario as a mutual fund salesperson with Clarica Investco Inc. ( Clarica ). 2 Clarica became a Member of the MFDA on January 11, Clarica terminated the Respondent after it learned he was engaging in undisclosed outside business activity with respect to arranging private loans and mortgages. 1 Formerly MFDA Rule 1.2.1(d). 2 On June 25, 2007, Clarica changed its name to Sun Life Financial Investment Services (Canada) Inc. Page 2 of 12

3 2. From November 29, 2006 to November 8, 2011, the Respondent was registered in Ontario as a mutual fund salesperson with Desjardins Financial Security Investments Inc. ( Desjardins ), a Member of the MFDA. Desjardins terminated the Respondent as a result of the events described herein. 3. At all material times, the Respondent was licensed in Ontario as an insurance agent and carried on this activity through the affiliated insurance distributors for Clarica and Desjardins: Clarica Financial Services Inc. and Desjardins Financial Security Independent Network, respectively. 4. The Respondent has been licensed in Ontario as a mortgage agent since July 1, At all material times, the Respondent conducted business in and around Dublin, Ontario, located near Stratford, Ontario. 6. The Respondent is not currently registered in the securities industry in any capacity. The Respondent is currently licensed by the Financial Services Commission of Ontario as an insurance agent and mortgage broker. Allegation #1 Undisclosed Dual Occupation A. Clarica 7. In July 2006, Clarica received a complaint from MB, an insurance client of the Respondent, alleging that the Respondent was arranging private loans and mortgages. 8. MB alleged that the Respondent had negotiated and arranged for private loans and mortgages between MB, as the borrower, and the Respondent and other persons, as the lenders, in respect of a property located at 27 Market Place in Stratford, Ontario. MB further alleged, among other things, that the Respondent was the principal of a business or undertaking which Page 3 of 12

4 arranged private loans and mortgages between a pool of approximately 40 private lenders (including clients of Clarica) personally recruited by the Respondent and individual borrowers. MB alleged that the private loans and mortgages charged high rates of interest and, in addition to interest payments the Respondent received, he also earned fees and other payments in respect of these activities, including a brokerage fee ranging from 5% to 10% of the value of the loan. 9. The Respondent had not previously disclosed to Clarica that he was involved in arranging private loans and mortgages and Clarica never approved the Respondent engaging in an outside business activity of this nature. After receiving MB s complaint, Clarica immediately commenced an investigation. 10. During the course of its investigation, Clarica interviewed the Respondent. The Respondent admitted to Clarica that he had arranged numerous private loans and mortgages for individuals during the time he was registered with Clarica, including the mortgage for MB relating to a restaurant located at 27 Market Place in Stratford, Ontario. The Respondent advised Clarica that he had taken over for his late father, who had, together with his relatives and friends, arranged private loans and mortgages for individuals in the local community. The Respondent denied that he solicited clients to be lenders but acknowledged that some of the individuals in the pool of lenders were clients. The Respondent stated that the loans and mortgages to MB were the only ones that the Respondent had arranged directly with a borrower; the Respondent stated that in all other instances the loans had been arranged by two mortgage brokers located in London, Ontario. 11. The Respondent acknowledged that he received fees and other payments in respect of his activities arranging private loans and mortgages. 12. In November 2006, based on the results of its investigation, which indicated that the Respondent had been carrying on an undisclosed outside business activity arranging private loans and mortgages for third parties, Clarica and its affiliated insurance distributor terminated its relationship with the Respondent. Page 4 of 12

5 B. Desjardins 13. In November 2006, following his termination by Clarica, the Respondent joined Desjardins as a mutual fund salesperson, as well as an insurance agent with its affiliated insurance distributor. 14. In the course of joining Desjardins, the Respondent disclosed to Desjardins in writing that he and his family members loaned personal monies to third party borrowers through private mortgages and received compensation for this activity. The Respondent characterized this activity as confined to his family s personal finances and carried out through mortgage brokers and lawyers who handled the transactions. By letter dated January 19, 2007, in response to follow-up inquiries from Desjardins, the Respondent described his activity as follows: With respect to personal finances, family members and myself do lend our personal money on real estate mortgages that are presented to us through the broker network. We receive a call and then review the real estate involved. If we feel positive about it, we agree to finance the loan and negotiate the rate with the broker who completes all required paperwork and forms through our lawyers. We receive interest and principle payments as well as a lenders fee that is based on the amount of work we have invested in making the decision to finance, any expenses incurred (mileage, appraisals, opinions, environmental, etc.) and a discharge fee for providing discharge statements and documents to release interest at time of payout. 15. Additionally, in the January 19, 2007 letter, the Respondent advised Desjardins that he was entering into a referral arrangement with a mortgage brokerage in a manner which suggested that clients in need of mortgage financing would be referred to an arm s length mortgage broker: One addition to our? [sic] will be an informal referral arrangement with M. & Associates, a mortgage brokerage in London. Clients in need of mortgage financing will be given the opportunity to discuss mortgage options with one of their representatives and in turn their clients given my name for their insurance needs. All of this business will be done on a no money exchange basis. Page 5 of 12

6 16. The Respondent failed to adequately explain, or omitted to explain, to Desjardins the true nature and extent of his activity in relation to arranging private loans and mortgages. The Respondent confined his explanations and descriptions of his activity to arranging private loans and mortgages in relation to his family s personal money. The Respondent did not disclose to Desjardins, as he had admitted to Clarica during the course of its investigation, that his outside activity included arranging private loans and mortgages between a pool of third party lenders, which included himself and some clients of Desjardins, and third party borrowers, some of whom may also be clients of Desjardins or its insurance distributor, and receiving a fee for this activity. 17. Based upon the Respondent s representations and omissions, Desjardins approved the Respondent s outside activity in relation to his family s personal finances. Licensed Mortgage Agent and Interra 18. On or about July 1, 2008, the Respondent became licensed in Ontario as a mortgage agent. The Respondent did not disclose his status as a licensed mortgage agent to Desjardins. 19. On December 11, 2008, the Respondent submitted a Dual Occupation/Outside Business Activities Representative Declaration form (the OBA Declaration ) to Desjardins in which he disclosed that, in addition to engaging in life and health insurance activities, he was the President of Interra Management Group ( Interra ) and had been since June In the OBA Declaration, the Respondent described his duties in relation to Interra as follows: administer family holdings of a real estate company + secure all financing + approve all purchase and sales. 20. In February 2009, in response to follow-up inquiries from Desjardins, the Respondent indicated that his family had a family trust, that one of the activities of the trust was that of a secondary private mortgage lender and that as a trustee of the family trust, the Respondent s responsibilities included overseeing the assets and administration of the family trust. Page 6 of 12

7 21. The Respondent did not disclose in the OBA Declaration or otherwise that he was licensed as a mortgage agent or that he was carrying on business arranging private loans and mortgages between third party lenders and borrowers, which may include clients. 22. Desjardins approved the Respondent s involvement with Interra based upon the Respondent s description of his activities. Complaint by LS 23. In March 2011, Desjardins received a complaint from an insurance client of the Respondent who alleged, among other things, that the Respondent had arranged for the insurance client to participate in the syndicate of lenders for MB s property at 27 Market Place in Stratford, Ontario. According to the insurance client, MB was in arrears of his mortgage payments and the client was owed approximately $194, Desjardins commenced an investigation of the complaint. During the course of its investigation, Desjardins received information from B2B Trust indicating that the Respondent was engaged in private mortgage lending activities involving approximately 40 individuals, at least some of which were current or former clients of Desjardins, through the facilities of B2B Trust. 25. The Respondent did not, at any time, disclose to Desjardins that his private loan and mortgage activities extended beyond his involvement with Interra and mortgage transactions involving family monies. Among other things, the Respondent failed to disclose to Desjardins that: (a) he solicited potential third party lenders; (b) he negotiated and arranged private loans and mortgages on behalf of third party borrowers and lenders; (c) he personally borrowed monies from third parties through private mortgages; and (d) his private loan and mortgage activities involved individuals who were not family members of the Respondent, including Desjardins clients and insurance clients. Page 7 of 12

8 26. On November 8, 2011, based on the results of its investigation, Desjardins terminated the Respondent. 27. By engaging in the conduct described above, the Respondent had and continued in another gainful occupation that was not disclosed to and approved by either Clarica or Desjardins by arranging private loans and mortgages on behalf of third party lenders and borrowers, including clients and other individuals, contrary to MFDA Rules 1.2.1(c) and Allegation #2 Personal Financial Dealings with Client SH 28. At all material times, SH was a client of Desjardins. The Respondent was the mutual fund salesperson responsible for servicing her accounts. 29. On or about March 3, 2011, the Respondent borrowed a total of $728,000 from 12 investors which was secured by a private mortgage on a property owned by the Respondent located at 7795 Alfred Street in Port Franks, Ontario. Client SH was one of the 12 investors. She loaned $43,000 of the total amount of $728,000 borrowed by the Respondent. 30. The mortgage between the investors and the Respondent was for a term of one year with interest at the rate of 9% per annum payable by the Respondent to the investors when the mortgage matured on March 8, Under the terms of the mortgage, client SH was entitled to an interest payment of $3, Client SH held the mortgage as an investment in a self-directed registered account at B2B Trust, which the Respondent had assisted client SH in opening. 32. The Respondent did not seek or obtain approval from Desjardins to borrow monies from client SH and Desjardins was not otherwise aware that the Respondent had borrowed monies from client SH. Client SH s mortgage investment was not processed through the accounts or facilities of Desjardins. Page 8 of 12

9 33. As stated in Allegation #1 above, following a complaint filed by an insurance client in March 2011, Desjardins conducted an investigation and terminated the Respondent in November By engaging in the conduct described above, the Respondent engaged in personal financial dealings with client SH, thereby giving rise to a conflict or potential conflict of interest between the Respondent and client SH which the Respondent failed to ensure was addressed by the exercise of responsible business judgment influenced only by the best interests of the clients, contrary to MFDA Rules and NOTICE is further given that the Respondent shall be entitled to appear and be heard and be represented by counsel or agent at the hearing and to make submissions, present evidence and call, examine and cross-examine witnesses. NOTICE is further given that MFDA By-laws provide that if, in the opinion of the Hearing Panel, the Respondent: has failed to carry out any agreement with the MFDA; has failed to comply with or carry out the provisions of any federal or provincial statute relating to the business of the Member or of any regulation or policy made pursuant thereto; has failed to comply with the provisions of any By-law, Rule or Policy of the MFDA; has engaged in any business conduct or practice which such Regional Council in its discretion considers unbecoming or not in the public interest; or is otherwise not qualified whether by integrity, solvency, training or experience, Page 9 of 12

10 the Hearing Panel has the power to impose any one or more of the following penalties: (a) a reprimand; (b) a fine not exceeding the greater of: (i) (ii) $5,000, per offence; and an amount equal to three times the profit obtained or loss avoided by such person as a result of committing the violation; (c) suspension of the authority of the person to conduct securities related business for such specified period and upon such terms as the Hearing Panel may determine; (d) revocation of the authority of such person to conduct securities related business; (e) prohibition of the authority of the person to conduct securities related business in any capacity for any period of time; (f) such conditions of authority to conduct securities related business as may be considered appropriate by the Hearing Panel; NOTICE is further given that the Hearing Panel may, in its discretion, require that the Respondent pay the whole or any portion of the costs of the proceedings before the Hearing Panel and any investigation relating thereto. NOTICE is further given that the Respondent must serve a Reply on Enforcement Counsel and file a Reply with the Corporate Secretary within twenty (20) days from the date of service of this Notice of Hearing. A Reply shall be served upon Enforcement Counsel at: Page 10 of 12

11 Mutual Fund Dealers Association of Canada 121 King Street West, Suite 1000 Toronto, Ontario M5H 3T9 Attention: Charles A. Toth Fax: A Reply shall be filed by: (a) providing 4 copies of the Reply to the Corporate Secretary by personal delivery, mail or courier to: The Mutual Fund Dealers Association of Canada 121 King Street West, Suite 1000 Toronto, Ontario M5H 3T9 Attention: Office of the Corporate Secretary; or (b) transmitting 1 copy of the Reply to the Corporate Secretary by fax to fax number , provided that the Reply does not exceed 16 pages, inclusive of the covering page, unless the Corporate Secretary permits otherwise; or (c) transmitting 1 electronic copy of the Reply to the Corporate Secretary by at CorporateSecretary@mfda.ca. A Reply may either: (i) specifically deny (with a summary of the facts alleged and intended to be relied upon by the Respondent, and the conclusions drawn by the Respondent based on the alleged facts) any or all of the facts alleged or the conclusions drawn by the MFDA in the Notice of Hearing; or (ii) admit the facts alleged and conclusions drawn by the MFDA in the Notice of Hearing and plead circumstances in mitigation of any penalty to be assessed. NOTICE is further given that the Hearing Panel may accept as having been proven any facts alleged or conclusions drawn by the MFDA in the Notice of Hearing that are not specifically denied in the Reply. Page 11 of 12

12 NOTICE is further given that if the Respondent fails: (a) to serve and file a Reply; or (b) attend at the hearing specified in the Notice of Hearing, notwithstanding that a Reply may have been served, the Hearing Panel may proceed with the hearing of the matter on the date and the time and place set out in the Notice of Hearing (or on any subsequent date, at any time and place), without any further notice to and in the absence of the Respondent, and the Hearing Panel may accept the facts alleged or the conclusions drawn by the MFDA in the Notice of Hearing as having been proven and may impose any of the penalties described in the By-laws. END. DM v2 Page 12 of 12