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

Transcription

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: Jack L. Comeau NOTICE OF HEARING NOTICE is hereby given that a first appearance will take place by teleconference before a hearing panel of the Prairie Regional Council (the Hearing Panel ) of the Mutual Fund Dealers Association of Canada (the MFDA ) in the hearing room at the MFDA offices, located at th Avenue S.W., Suite 850, Calgary, Alberta on December 5, 2016 at 11:00 a.m. (Mountain), or as soon thereafter as the appearance can be held, concerning a disciplinary proceeding commenced by the MFDA against Jack L. Comeau (the Respondent ). The Hearing on the Merits will take place in Saskatoon, Saskatchewan at a time and venue to be announced. DATED this 31 st day of October, Sarah Rickard Sarah Rickard Director of Regional Councils Mutual Fund Dealers Association of Canada 121 King Street West, Suite 1000 Toronto, ON M5H 3T9 Telephone: Facsimile: corporatesecretary@mfda.ca Page 1 of 13

2 NOTICE is further given that the MFDA alleges the following violations of the By-laws, Rules or Policies of the MFDA: Allegation #1: In February 2010, the Respondent prepared and delivered a written communication to client JP which was not approved by the Member, and contained statements or conclusions with respect to the risks, features and rates of return of exempt market products he was recommending to the client that were misleading, unwarranted or exaggerated, or that failed to identify the material assumptions made in arriving at those statements or conclusions, contrary to MFDA Rules 2.7, 2.8, 1.1.2, and Allegation #2: In May 2011, the Respondent prepared and delivered a written communication to clients, including client KP, with respect to an exempt product he was recommending to clients, which communication had not been approved by the Member and failed to describe the potential risks of the investment to the clients, contrary to MFDA Rules 2.7, 2.8, and Allegation #3: Between 2008 and 2010, the Respondent engaged in securities related business that was not carried on for the account and through the facilities of the Member by selling, recommending, referring or facilitating the sale of approximately $2.25 million of an exempt market product to at least 27 clients, contrary to MFDA Rules 1.1.1, 2.4.2, 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 January 1996 until November 7, 2011 when he resigned, the Respondent was registered in Saskatchewan, British Columbia, Manitoba, and Alberta as a mutual fund Page 2 of 13

3 salesperson (now known as a dealing representative) with Sentinel Financial Management Corp. ( Sentinel ), a Member of the MFDA. 2. At all material times, the Respondent conducted business in Saskatoon, Saskatchewan and operated under the approved trade name, Comeau Financial Inc. ( Comeau Financial ). 3. Since January 16, 2012, the Respondent has been registered in Saskatchewan, Alberta, British Columbia, and Manitoba as a dealing representative with an exempt market dealer. Allegation #1: Memorandum to Client JR 4. In 1998, client JR became a client of Sentinel. At all material times, the Respondent was the mutual fund salesperson responsible for servicing his accounts at Sentinel. 5. In about February 2010, the Respondent and client JR discussed investing client JR s pension monies. At that time, client JR was 48 years old and had recently left his previous employment to begin working full time with his spouse at their family farm. 6. On or about February 19, 2010, the Respondent prepared, and delivered to client JR, a memorandum with the subject line, Information on alternative investments for [JR s] pension (the Memorandum ). The Memorandum stated, among others, the following: As discussed last Tuesday, I am enclosing some information on the various alternative investment opportunities that are currently available, and which I think would be appropriate for you to consider for your pension. As mentioned, I am recommending alternative investments to most of my clients for the following reasons: 1. The alternative investments have no or little correlation to the stock market, so they provide optimal diversification to investors who currently hold mutual funds and/or individual stocks. Greater diversification = lower overall level of risk for the portfolio. 2. The alternative investments that I deal with generally have potential for above-average returns. Invesotrs (sic) are eager to invest into investments that Page 3 of 13

4 are generating good excelelnt (sic) returns, as their mutual funds have not sone (sic) so in the last 10 years. 3. The risk level of the alternative investments is generally low. There is no volatility. The biggest risk is typically illiquidity and time. The risk/reward profile of the alternative investments that I offer my clients is very attractive (low risk high returns). 4. The alternative investments that I deal with allow investors to participate in business venture that they normally would not be able to do so on their own (due to lack of funds, lack of time and/or lack of expertise). Ventures such as land development, oil production, and commercial properties are generally very profitable ventures that few investors can partake in. I have enclosed some information on several land deals (Westbridge Riverband project in Saskatoon; Walton Verona project in Pheonix (sic), Arizona). With both of these projects they will be converting land which is not very arable into urban land, therefore increasing their values substantially. In addition, I have enclosed some information on the Standard Capital Resources fund. This is a very exciting investment opportunity investing in oilwells. This investment is projected to pay out a quarterly cashflow of 18 25% per year. I am very bullish on the price of crude oil, and therefore believe that this will be a very strong investment opportunity. Lastly, I am enclosing some information on the Optimus U.S. Real Estate fund. This fund has been purchasing real estate properties in Pheonix (sic) and Las Vegas for crazy bargain-basement prices. The fund plans to pay out a yearly distribution in the 6-8% range, and sell the properties at greatly enhanced prices on the U.S. real estate market has turned around. This is anticipated to take 3-5 years, but the expectations are for very large returns (possibly in the range of doubling to tripling). So, you can see that these alternative investments are very diversified, and all have great potential. They are a great compliment to mutual funds, and have the benefit of greatly enhancing the risk/reward ratio of your investment portfolio. I am recommending that you consider investing all or a good portion of your pension fund into these ideas. The remainder (if you don t want to put it all into alternative investments could be invested into more mutual funds). [Emphasis added.] 7. The alternative investments described in the Memorandum are exempt market products. Page 4 of 13

5 8. The Memorandum constituted a sales communication within the meaning of MFDA Rule 2.7 or a client communication within the meaning of MFDA Rule The Memorandum contained statements or conclusions with respect to the risks and features of exempt market products that were misleading, unwarranted or exaggerated, including but not limited to the following: (a) (b) (c) exempt market products provided optimal diversification which would lower the overall level of risk for the portfolio ; the risk level of the alternative investments is generally low ; and the risk/reward profile of exempt market products was low risk high returns. 10. In addition, the Memorandum contained statements or conclusions with respect to the anticipated rates of return for exempt market products which were misleading, unwarranted or exaggerated, and failed identify the material assumptions made in arriving at those statements or conclusions. 11. The Respondent recommended that client JR invest his pension monies in exempt market products, as described in the Memorandum, without providing a balanced presentation with respect to the risks and benefits of the investments. 12. Sentinel was not aware of, and did not approve, the Respondent s Memorandum. 13. Following the receipt of the Memorandum, client JR invested his pension monies and group Registered Retirement Savings Plan ( RRSP ) monies as described below. 14. On or about March 1, 2010, client JR transferred approximately $41,633 from his group RRSP with his former employer to his Sentinel RRSP account. On the same day, client JR also signed a subscription form to purchase $23,000 of the Standard Capital Resources fund Page 5 of 13

6 ( Standard Resources ) in his RRSP account. Standard Resources was an exempt market product specifically referenced by the Respondent in the Memorandum. 15. On or about April 7, 2010, client JR signed a New Account Application Form to open a Locked-In Retirement Account ( LIRA ). On the same day, client JR transferred the commuted value of his company pension with his former employer, which was approximately $84,181, to the LIRA. 16. On June 28, 2010, shortly after the pension transfer to the LIRA was completed, client JR signed subscription forms to invest $59,850 in Standard Resources and $18,900 in the Optimus U.S. Real Estate fund ( Optimus ). Optimus was an exempt market product specifically referenced by the Respondent in the Memorandum. 17. On February 18, 2011, client JR signed three subscription forms to invest a total of $37,000 in Westpoint Capital High Yield Mortgage Investment Corporation, an exempt market product, in his RRSP account. 18. On September 22, 2011, the Alberta Securities Commission ( ASC ) issued a cease trade order prohibiting any trading of Standard Resources. 19. On November 7, 2011, the Respondent resigned from Sentinel. 20. In 2012, Standard Resources merged with Northern Patriot Oil and Gas ( NPOG ) and client JR s holding of Standard Resources were converted to shares of NPOG. 21. On February 26, 2013, NPOG was placed in receivership. 22. Client JR suffered investment losses as a result of the Respondent s investment recommendations described in the Memorandum. Page 6 of 13

7 23. By virtue of the foregoing, the Respondent prepared and delivered a written communication to client JP which was not approved by the Member, and contained statements or conclusions with respect to the risks, features and rates of return of exempt market products he was recommending to the client that were misleading, unwarranted or exaggerated, or that failed to identify the material assumptions made in arriving at those statements or conclusions, contrary to MFDA Rules 2.7, 2.8, 1.1.2, and Allegation #2: to Client KP and Other Clients 24. In August 2006, client KP became a client of Sentinel. At all material times, the Respondent was the mutual fund salesperson responsible for servicing his accounts at Sentinel. 25. On or about May 11, 2011, the Respondent created and sent an (the May ) to clients he serviced at Sentinel who had already invested in Standard Resources which stated, among other things: New Offer I have been told by Standard Resources that there will be an offer from a competing oil company to purchase the Niton Wells from unit holders. While this offer has not been disclosed to unitholders yet, and I am in the process of evaluating it, it appears that it will be a very good one for unit holders. It appears that the price will be in the $8.50 to $9.40 range, resulting in very large gains for unit holders. If this offer ends up being accepted, unitholders would likely be paid out within a 2-4 month period, and be allowed to re-invest in the Standard Resources fund, as the Standard Resources fund plans to purchase new wells and repeat the entire process. What does this mean for unitholders? Well, if you were one of the original unitholders, who bought in at $5.00/unit, this offer would mean that your units grew by 70% to 88% (depending on the exact offer price), plus you would have received distributions totaling 14% to date. All of this in a period of 1.5 years! In the next few days, you will likely receive correspondence from Standard Resources outlining the offer in greater detail. I am in the process of evaluating the deal myself, but my initial view is that it appears to be a very positive situation for unitholders. I wanted to give you a heads up before you receive the notification from Standard Resources. Page 7 of 13

8 So far this has been a spectacular investment and this offer would allow investors to solidify their gains, yet provide them the opportunity to re-invest and continue to be involved in this same investment concept with the same successful management team. Lastly, it appears that the fund offering will be re-opened for purchase at $7.30/unit until the offer is finalized. So investors will have a small window of opportunity to buy in before the offer of $ $9.40/unit is accepted. This represents an opportunity to experience quick gains of 16.4% to 28.7% (depending on actual offer price)! Please give me a call or send me an if you have questions pertaining to this offer, or wish to purchase more units. Thanks. [Emphasis added.] 26. The May constituted a sales communication within the meaning of MFDA Rules 2.7 or a client communication within the meaning of MFDA Rule The May failed to fairly present the potential risks of the investment to clients, including the risks that it would not generate the rates of return identified by the Respondent. 28. The May contained representations with regards to the investment which were detrimental to the interests of clients and the public. 29. Sentinel was not aware of, and did not approve, the Respondent s dated May 11, On or about May 12, 2011, client KP (who was not an existing investor in Standard Resources) and the Respondent discussed the possibility of client KP investing in Standard Resources. 31. At about the same time, the Respondent sent a copy of his dated May 11, 2011 (as described in paragraph 25 above) to client KP. On or about May 18, 2011, client KP also received a copy of this from another investor in Standard Resources. Page 8 of 13

9 32. On June 24, 2011, based upon the information received from the Respondent, client KP invested $32,120 in Standard Resources As described above, on September 22, 2011, the ASC issued a cease trade order prohibiting any trading of Standard Resources. In 2012, Standard Resources merged with NPOG and his holdings of Standard Resources were converted to shares of NPOG. NPOG was placed in receivership in February To date, client KP has been unable to recover his investment in Standard Resources. 35. By virtue of the foregoing, the Respondent prepared and delivered a sales communication with respect to an exempt product he was recommending to clients, which had not been approved the Member and failed to describe the potential risks to clients, contrary to MFDA Rules 2.7, 2.8, 1.1.2, and Allegation #3: Sale of Unapproved Securities Outside the Member 36. Between 2008 and 2010, the Respondent sold, recommended, referred or facilitated the sale of at least $2.25 million of an exempt market product, namely bonds issued by Grasswood Property Finance Inc. ( Grasswood ), to at least 27 clients outside the facilities of Sentinel. 37. Grasswood is an Alberta corporation which is involved in real estate development. 38. The investments made by the 27 clients are summarized below: Client Name Amount Invested Client 6****2 Saskatchewan Ltd $35,000 Client EB $100,000 Clients NB and NB $250,000 Clients DE and BE $125,000 Client IG $100,000 Client AG $10,000 1 Client KP held $24,820 of Standard Resources in his Registered Retirement Savings Plan and held $7,300 of Standard Resources his open account at Sentinel. Page 9 of 13

10 Client HH $50,000 Client SH $200,000 Client DH $100,000 Client AM $200,000 Client WM $75,000 Client WN $100,000 Client EO $75,000 Clients DS and JS $100,000 Client KS $10,000 Client MS $100,000 Client RD $25,000 Client CS $200,000 Clients AS and SS $50,000 Client PS $20,000 Clients AW and RW $200,000 Client GW $100,000 Total Amount Invested $2,225, The Respondent received commissions, referral fees or other compensation totaling at least $400,000 in respect of his activities pertaining to Grasswood. 40. The Grasswood bonds were not an investment product which was approved for sale by Sentinel. 41. Sentinel did not have a referral arrangement in place with Grasswood. 42. None of the Respondent s activities with respect to Grasswood were conducted through the facilities of Sentinel. 43. By virtue of the foregoing, the Respondent engaged in securities related business that was not carried on for the account and through the facilities of the Member, contrary to MFDA Rules 1.1.1, 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. Page 10 of 13

11 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, the Hearing Panel has the power to impose any one or more of the following penalties: (a) (b) a reprimand; a fine not exceeding the greater of: (i) $5,000, per offence; and (ii) an amount equal to three times the profit obtained or loss avoided by such person as a result of committing the violation; (c) (d) (e) (f) 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; revocation of the authority of such person to conduct securities related business; prohibition of the authority of the person to conduct securities related business in any capacity for any period of time; such conditions of authority to conduct securities related business as may be considered appropriate by the Hearing Panel; Page 11 of 13

12 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 Office of 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: Mutual Fund Dealers Association of Canada 121 King Street West, Suite 1000 Toronto, ON M5H 3T9 Attention: Maria Abate Fax: mabate@mfda.ca A Reply shall be filed by: (a) providing four (4) copies of the Reply to the Office of the Corporate Secretary by personal delivery, mail or courier to: The Mutual Fund Dealers Association of Canada 121 King Street West, Suite 1000 Toronto, ON M5H 3T9 Attention: Office of the Corporate Secretary; or (b) (c) transmitting one (1) copy of the Reply to the Office of the Corporate Secretary by fax to fax number , provided that the Reply does not exceed 16 pages, inclusive of the covering page, unless the Office of the Corporate Secretary permits otherwise; or transmitting one (1) electronic copy of the Reply to the Office of the Corporate Secretary by at corporatesecretary@mfda.ca. Page 12 of 13

13 A Reply may either: (i) (ii) 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 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. NOTICE is further given that if the Respondent fails: (a) (b) to serve and file a Reply; or 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 v1 Page 13 of 13