Estate No. 31-457506 and Court File No. 31-OR-207984-T IN THE MATTER OF THE BANKRUPTCY OF W.H. STUART MUTUALS LTD. REPORT OF THE TRUSTEE S PRELIMINARY ADMINISTRATION OF THE ESTATE OF W.H. STUART MUTUALS LTD. INTRODUCTION AND DISCLAIMER 1. On September 18, 2013, a bankruptcy order was made against W.H. Stuart Mutuals Ltd. ( Stuart Mutuals or the Bankrupt ) and Ernst & Young Inc. was appointed as the Trustee in Bankruptcy (the Trustee ). The Trustee presents hereunder our Report on the Trustee s Preliminary Administration of the Estate of W.H. Stuart Mutuals Ltd. (the Report ). 2. In developing this Report, the Trustee has relied on the very limited records of the Bankrupt which the Trustee has to date been able to locate or have access to. The Trustee has not performed an audit or verification of such information and accordingly we present no opinion thereon. 3. This Report has been prepared solely for the use of the Bankrupt s creditors (the Creditors ) as general information on the state of affairs of the Bankrupt. Given the nature of the Trustee s mandate, this information is preliminary only and is subject to change as the mandate progresses. In light of the foregoing, the Report should not be circulated or used for other purposes or reproduced without our knowledge and prior written permission. The Trustee will not assume responsibility or liability for losses incurred by the reader as a result of the circulation, publication, reproduction or use of the Report contrary to the provision of this paragraph. 4. Copies of documents relating to the bankruptcy proceedings are available on the Trustee s website at: www.ey.com/ca/whstuart. BACKGROUND 5. Stuart Mutuals was incorporated on April 1, 1986 under the laws of the province of Ontario. The Bankrupt was a mutual fund dealer. It has been a registered mutual fund dealer with the Mutual Fund Dealers Association of Canada (the MFDA ) since March 4, 2003. 6. Marilyn Dianne Stuart ( Dianne Stuart ) was registered in Ontario as a dealing representative and as the Ultimate Designated Person of Stuart Mutuals. She was registered as an officer and director of Stuart Mutuals since it became a Member of the MFDA. 1
7. Stuart Mutuals was designated in discretionary early warning by MFDA Compliance Staff effective January 22, 2013 as a result of a transfer of funds from its operating account to a related entity, W.H. Stuart Insurance Agency Ltd., causing the trigger of a capital deficiency. 8. On April 29, 2013, the MFDA issued a notice of application against the Bankrupt and Dianne Stuart, seeking to suspend their respective registrations. 9. On May 9, 2013, a notice of termination was filed by Stuart Mutuals on behalf of Dianne Stuart indicating that she was resigning from registration as a dealing representative and as the Ultimate Designed Person of Stuart Mutuals. 10. On May 10, 2013, an asset purchase agreement was entered into between the Bankrupt and four of its related companies, W.H. Stuart Insurance Agency Ltd., W.H. Stuart Investments Ltd., S21C Ltd., and S21C Technologies Ltd. (collectively, the W.H. Stuart Group ) as sellers, with Keybase National Financial Services Inc. ( Keybase ) as purchaser. A copy of the asset purchase agreement has been provided to the Trustee. 11. The Trustee understands that the W.H. Stuart Group was unable to meet all the conditions precedent to close the asset purchase agreement, however, with the consent of the MFDA, on or about May 17, 2013, Keybase assumed all of the customers and certain of W.H. Stuart Group s authorized representatives. 12. On May 31, 2013, the Bankrupt was suspended by the MFDA and it is not permitted to conduct securities related business except with prior authorization. 13. Some of the reasons determined by the MFDA for the suspension included: a) Unauthorized redemptions being processed in client accounts; b) Clients and other individuals being solicited to purchase investment notes or similar instruments issued by the Bankrupt or an affiliate offering an annual return of 7% or other interest rate; c) Cash positions in client accounts at least temporarily did not appear on account records of the Bankrupt; and d) During the process of transferring accounts from Stuart Mutuals to third party dealers and other financial institutions, the redeemed proceeds of the account were deposited into the operating account of the Bankrupt s affiliate and potentially used for the benefit of the Bankrupt or its affiliates. 2
14. A complete list of all MFDA proceedings against the bankrupt can be found on the MFDA s website at http://www.mfda.ca/ipc/whstuart.html. 15. At the end of July 2013, Keybase mailed customer statements for the month end June 30, 2013. As part of that process, former clients of Stuart Mutuals were asked to review their account statements to ensure the transfer of the assets from the Bankrupt to Keybase was complete. Certain of the Bankrupt s former clients had discrepancies with their accounts or did not receive a Keybase statement (the Affected Customers ). The Trustee understands that the Affected Customers were either missing securities or cash balances in their accounts. BANKRUPTCY PROCEEDINGS 16. On August 23, 2013, the MFDA Investor Protection Corporation ( MFDA IPC ) applied for a Bankruptcy Order against the Bankrupt. The Bankruptcy Order was made on September 18, 2013. Ernst & Young Inc. was appointed as Trustee. 17. Upon being appointed Trustee, a representative attended at the premises of Stuart Mutuals at 20 Valleywood Dr., Unit 100, Markham, Ontario. Certain records of the Bankrupt were at the premises and the Trustee took possession of these records. 18. On September 18, 2013, the Court also made an Order (the Bankruptcy Administration Order ) relating to the administration the Bankrupt s Estate, including, a. Extending the five day period for sending the Trustee s prescribed notice to twenty-one days from the date of the Bankruptcy Order; b. Extending the period during which the first meeting of creditors must be held to fifty-one days from the date of the Bankruptcy Order; c. Authorizing the Trustee to send a one page notice to the potentially Affected Customers of the Bankrupt; d. Authorizing the Trustee to send a one page notice to the unaffected clients of the Bankrupt; and e. Authorizing the Trustee to borrow an amount not to exceed $100,000.00 from the MFDA IPC on an interest free basis and without personal liability for the purpose of funding the exercise of the powers and duties conferred upon the Trustee by the Bankruptcy and Insolvency Act or the Court. 3
19. A mailing list consisting of the customers who appeared to hold unaffected accounts was received from Keybase. 20. A listing was obtained from the MFDA IPC which consisted of the mailing information for the Affected Customers and as well as those who have filed a claim with the MFDA IPC. 21. On October 9, 2013, the Trustee completed a mailing as outlined in the Bankruptcy Administration Order dated September 18, 2013. A notice was mailed to those identified as unaffected customers and a separate notice was mailed to those identified as Affected Customers. 22. A bankruptcy package was mailed to the known creditors of the Bankrupt. The package included a notice of the bankruptcy and first meeting of creditors, a list of creditors, a proof of claim and a proxy. 23. The Trustee has contacted two branches of the financial institutions that Stuart Mutuals had dealt with and held accounts at, being The Bank of Nova Scotia ( BNS ) and CIBC. The Trustee contacted both these financial institutions to obtain any remaining funds in any of the Stuart Mutuals accounts as well as to receive copies of previous bank accounts and copies of cancelled cheques. To date, we have received the total of $61,625.13 from BNS as well as bank statements and cancelled cheques for a period of September 2012 through to September 2013. The Trustee is working with CIBC to obtain similar information and determine if any funds can be recovered. 24. Representatives of the MFDA IPC have attended at the premises of the Trustee and reviewed these bank statements. 25. On October 28, 2013, a newspaper advertisement was placed in the Globe and Mail (National Edition) informing Creditors of the bankruptcy of Stuart Mutuals and the date and time of the meeting of Creditors. 26. Due to the co-mingling of the information of the W.H. Stuart Group s financial information and privacy concerns, Keybase requested that the Trustee obtain a court order prior to it releasing certain electronic and other information to the Trustee. The Trustee will be filing a motion seeking an order, among other things, requiring Keybase and certain other parties to provide to the Trustee any financial or electronic records of the Bankrupt that is or may be in their possession. 4
FINANCIAL RESULTS OF THE COMPANY 27. Summarized in the table below are the Bankrupt s assets and liabilities as set out in its amended Statement of Affairs dated October 16, 2013: Assets $61,625.13 Liabilities Secured 0.00 Customer Claims $8,067,797.02 Unsecured Claims Priority Claims Unknown Unsecured $491,146.99 28. As of the date of bankruptcy, the Bankrupt was not actively involved in carrying on business, had no employees and had all of its customer named securities transferred to Keybase. 29. The MFDA IPC claims process for former customers of Stuart Mutuals is underway and the MFDA IPC is in the process of reviewing the claims it has received to date. Pursuant to the Bankruptcy Administration Order, the Trustee intends to use claims that are filed with the MFDA IPC as proofs of claim filed in the bankruptcy proceedings. To date, the Trustee and the MFDA IPC have received 170 claims, totaling $8,523,432.53. The Trustee will continue to work closely with the MFDA IPC through this process. 30. In accordance with Part XII of the Bankruptcy and Insolvency Act ( BIA ), all cash and securities held by Stuart Mutuals, as well as any cash and securities held by or for the account of Stuart Mutuals for a customer (other than customer name securities as that term is defined in the BIA) are to be placed in a single fund called the customer pool fund. All other assets form the general fund. The customer pool fund is allocated first to cover the costs of administration and then to cover customer claims in proportion to each customer s net equity position. Any funds remaining after that distribution are paid into the general fund, which is distributed in accordance with the scheme set out in the BIA. 31. The MFDA IPC has provided a third party guarantee agreement to the Trustee in the amount of $25,000 plus fees and disbursements on account of the basic statutory bankruptcy and a further amount on account of any investigative services that are undertaken by the Trustee. 32. The costs associated with the administration of the estate will be paid using any assets that are collected by the Trustee and any shortfall resulting therefrom will be paid using the guarantee and the funding mechanisms described in paragraphs 31 and 18 above. 5
LEGAL PROCEEDINGS 33. To date, the Trustee has not initiated any legal proceedings during its administration of the Bankrupt s estate to date. The Bankrupt has a pending lawsuit against AGF Funds Inc. that the Trustee will examine with counsel and the inspectors (once appointed) (the Inspectors ) to decide if it is advisable to continue. 34. The Trustee intends to rely on legal advice obtained from the MFDA IPC s counsel, Borden Ladner Gervais LLP, subject to the approval of the Inspectors. PROVABLE CLAIMS 35. On October 4, 2013, the MFDA IPC provided the Trustee with a list containing information relating to the 150 customer claims that have been filed with the MFDA IPC (the MFDA IPC Claims ). The MFDA IPC covers eligible losses of property that result from the insolvency of a member firm, such as Stuart Mutuals, up to a limit of $1,000,000 per customer for any combination of securities, cash, segregated funds or other property with which the firm is entitled to deal. The aggregate amount of the MFDA IPC Claims is $8,523,432.53. The MFDA IPC has filed a provisional claim with the Trustee in the amount of $8,523,432.53, representing the face amount of the MFDA IPC Claims. As discussed above, the Trustee understands that the MFDA IPC is in the process of reviewing the MFDA IPC Claims it has received to date. The Trustee anticipates that it will participate in that review process. 36. As at the date of this Report, the Trustee has received 247 claims representing the following claim amounts: Secured $63,565.49 Customer Claims $8,523,432.53 MFDA IPC Contingent $8,523,432.53 Preferred $0.00 Unsecured Claims $898,140.96 37. Other than amounts filed by Affected Customers and the MFDA IPC, the claims consisted of claims made by CRA, Stuart Mutuals former representative brokers who were owed commissions 6
and claims made by certain suppliers and other ordinary creditors such as the Bankrupt s former landlord. PREFERENCES AND TRANSFERS AT UNDERVALUE 38. As described above, the Trustee has not yet had an opportunity to conduct a review of the books and records of the Bankrupt to determine the extent of any preferences or transactions at undervalue. The Trustee will consult with the Inspectors once additional information is received from Keybase or any other third party. ANTICIPATED REALIZATIONS AND PROJECTED DISTRIBUTION 39. Based on the estate assets identified to date and described in this Report, it is not expected that there will be any distribution from the Bankrupt s estate for either the customer pool or general pool creditors. Dated at Toronto, Ontario this 6 th day of November, 2013. ERNST & YOUNG INC., solely in its capacity as Trustee in Bankruptcy of W.H. Stuart Mutuals Ltd., a bankrupt Per: Brian M. Denega Senior Vice President Christopher Mediratta Vice President 7