Media Coverage That Understands Investor Abuse

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Re: Media Coverage That Understands Investor Abuse

Postby admin » Mon May 10, 2021 10:02 am ... punishment

How mutual fund salespeople in Canada who lie, cheat and steal from clients are escaping justice
Although the Mutual Fund Dealers Association has banned dozens of mutual fund sellers, a Post investigation finds that only a small minority of cases are pursued by police and prosecutors

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Claire Brownell
Publishing date:Apr 13, 2015 • April 13, 2015 • 11 minute read

Canada’s court system is hardly known for bringing criminals, especially the white-collar variety, to swift justice. Yet somehow Mark Lindsay — a mutual fund salesman who had lied to and stolen from a long list of his close friends and family — found himself on the other end of a criminal fraud sentence, before his own industry figured out how it wanted to deal with him.

In October of 2010, the Southern Ontario-based Investors Group mutual fund salesman stood in a courtroom pleading guilty to a charge of fraud over $5,000. It would be several months later that the Mutual Fund Dealers Association would conclude that the charge covered just a small portion of the crimes it said he committed over a 14-month period ending in December 2008.

When the MFDA issued its ruling in June of 2011, it found Lindsay processed loans for clients without their knowledge, lied to clients about where their money was coming from and what he was doing with it, and forged their signatures to redeem investments early and pocket the cash. “He is a thief, forger, and liar who stole over $300,000 from his clients,” the hearing panel wrote. Those clients included Lindsay’s own grandmother. The MFDA’s file of evidence even included a confession: An email from Lindsay reading “i am guilty of all the actions noted…i agree to all allegations.”

By the time the panel ruled, an Ontario judge had already sentenced Lindsay to restitution and two years of probation (Investors Group, which was also deceived, made $400,000 in payouts to Lindsay’s clients; contacted for an interview the company responded with an emailed statement outlining its fraud-prevention policies).

But what’s notable about the case is not that the criminal justice system dealt with Lindsay faster than the industry’s regulators; it’s that the salesman ended up seeing the inside of a courtroom at all. Although the MFDA has fired and banned dozens of mutual fund sellers over the last two years — many accused of committing similar kinds of drastic deceptions that Lindsay was — a Financial Post investigation finds that only in a very small minority of cases are their cases pursued by police and prosecutors.

The MFDA maintains that it refers cases to authorities routinely. But there are those who believe that something isn’t working: That either the MFDA is not being diligent enough about collaborating with authorities to spur criminal charges, or that the MFDA’s own rules make it difficult to do so.

I’m always concerned when somebody, especially people dealing with such huge amounts of dollars, are getting away with it
In an analysis of almost 100 MFDA enforcement records over 2013 and 2014, the Post examined what happens to mutual fund salespeople who are found by the MFDA to have stolen money from clients, bullied and threatened clients into loaning them money, and forged documents to open up risky investment loans.

The analysis found 20 records where, if the MFDA’s findings were accurate, representatives engaged in behaviour sufficiently troubling as to raise the question of whether the criminal justice system should review the cases.

Only three of these cases, or 15 per cent, appear to have resulted in criminal charges being laid. Because Canada lacks a publicly accessible national database of criminal records, the analysis relied on phone calls to local police departments and inquiries with the courts, in addition to searches through online data.

The MFDA does use its regulatory power to impose fines on dealers it finds to have acted improperly. They look hefty on paper, but once it expels a member, the association lacks any real power to force payment. The regulator noted in its 2014 annual report that it was able to collect just 1.4 per cent of the $3.6 million in fines it levied that year against people who have since left the industry.

Shaun Devlin, head of enforcement for the MFDA, said the regulator always notifies police when it uncovers suspected criminal activity. “We are always looking for ways to make sure this information is brought to the attention of law enforcement officials so that can be considered and they can make a decision about what to do with those cases,” he said.

But conversations with police departments across the country indicate this is not consistently the case. The MFDA does participate in quarterly Toronto-area information-sharing meetings with members of Ontario police departments. But in Calgary, Colin Harper, acting staff sergeant of the Calgary Police Service economic crimes unit, said he has never heard of the MFDA bringing a single case to his department’s attention.

That includes the second-largest case the MFDA closed during the two-year period analyzed by the Post: a case involving an alleged $1.6 million Calgary-based fraud, adjudicated by the association in 2013. Harper confirmed the MFDA never contacted Calgary police despite the large dollar amount and considerable evidence collected by the MFDA in the course of its investigation. The MFDA says it does not comment on specific cases.

“I’m always concerned when somebody, especially people dealing with such huge amounts of dollars, are getting away with it. You get walked out of the office and that’s the only consequence,” he said. “My concern would be that they move on to another company in the same industry and perhaps do the same thing.”

Indeed, in addition to the three out of 100 that are confirmed to have been charged for significant crimes, this investigation uncovered two more disciplined MFDA members who were not charged for their behaviour with with mutual funds — but after being sanctioned went on to get in further trouble that resulted in them being charged criminally.

In the period 2013–14, the amount the MFDA claims was stolen by salespeople ranged from $3,500 to $11.6 million. The representative in the latter case, Toronto’s Paul Yoannou, was one of the three who were criminally charged. Yoannou was sentenced to six years in prison last year after pleading guilty.

(The Post’s investigation restricted its scope to cases that appeared to constitute crimes, as defined by the Criminal Code, and where it appeared that the representative should have reasonably known the behaviour would harm victims or amount to improper personal gain. Not included, for instance, were cases where mutual fund salespeople were found to have forged client signatures for the sake of convenience; but the investigation included several cases where the MFDA found representatives falsified information to get around limits on highly leveraged — and handsomely commissioned — investments.)

One of the victims of Mark Lindsay, who spoke on condition of anonymity because he didn’t want to open old family wounds, said he has discovered the low rate of criminal charges to be shocking. In that case, victims made the difficult decision to go to the police and the MFDA themselves.

“You’re talking how many millions of dollars? Why isn’t there police involvement?” he said. “But someone down the street is ripping off a senior citizen’s purse and they go chase after him? That doesn’t make sense.”

The Canadian Securities Administrators established the MFDA in 1998, in response to the skyrocketing popularity of mutual funds. Today, the MFDA’s 81,000 representatives handle a vast amount of the country’s wealth. As of February, Canadians had $1.2 trillion invested in mutual funds, almost one-third of their total financial wealth, according to the Investment Funds Institute of Canada.

Because mutual funds allow small investors to pool capital in professionally managed portfolios, salespeople market heavily to average, middle-class Canadians with limited investment knowledge. Investors are to trust that their mutual fund representative is an expert with their best interests at heart.

One of the goals of the MFDA’s enforcement system is to impose meaningful penalties when their representatives breach that trust.

In one case, the MFDA sanctioned Markham, Ont. representative Enzo DeVuono for what they claim was an overstatement of the income and investment knowledge of two married clients, who he then helped qualify for a leveraged investment — effectively a loan to buy more funds. One of those clients was a retired bus driver with a Grade 7 education, while the other was mentally handicapped. But Harold Geller, an Ottawa-based lawyer with McBride Bond Christian LLP who has represented both mutual fund salespeople and their clients, said even cases that appear to be examples of misrepresentation are probably beatable in a criminal court, because of the MFDA’s unclear rules and procedures.

He believes there is too much grey area in the association’s rules around what a salesperson can use to qualify a client within a certain risk category, or how to definitely qualify a client’s income and financial security — critical concepts when managing a client’s risk tolerance level. In a court of law, he said, a prosecutor would have a hard time proving a representative deliberately deceived clients to enrich him or herself, as opposed to just misunderstanding or making a mistake.

“How can you prosecute on a criminal level when the rules are so obscure?” Geller said. “The MFDA rules need a complete overhaul.”

Between 2013 and 2014 there were an additional 12 cases where mutual fund salespeople “misappropriated” client funds, as the MFDA calls it. A common method the salespeople used was to incorporate a company with a misleading name and get clients to make cheques out to it, thinking the money would be used to purchase securities.

In one case, Barrie, Ont. representative Reginald Roskaft was found to have incorporated a company called Corporate Receivables Agency and cashed client cheques made out to CRA — payments the clients thought were going to the Canada Revenue Agency for taxes. Roskaft was sanctioned by the MFDA in April 2014. Criminal charges were not laid. However, after the MFDA dealt with him, in November 2014 Roskaft went on to get into legal trouble: he was charged by police with running a Ponzi scheme. He has not been convicted and the case is ongoing.

In another case, the MFDA also disciplined Halifax mutual fund salesman Geoffrey Gaunt who it found had pressured a client to loan him money, allegedly using his control over her portfolio as leverage. Gaunt generally co-operated with the MFDA investigation, and in a letter to the association said he would “let stand the evidence” the association had compiled and, according to the MFDA, Gaunt did “not deny the Allegations brought against him.” No charges have been laid.

Because MFDA decisions are not backed by the same enforcement authority as a court of law, of the $12,372,500 in fines and costs levied against the 20 mutual fund salespeople disciplined in the cases between 2013 and 2014, only $20,000 has so far been repaid.

Devlin, the MFDA’s head of enforcement, said the regulator has asked provincial securities commissions for the power to enforce fine payment by non-members — or, more to the point, ex-members — but so far, it has been to no avail. He said the regulator’s most important enforcement role is suspending people who have made serious ethical breaches from the profession, with 75 per cent of the cases the MFDA completed last year resulting in a suspension or a permanent ban.

“The primary job of a regulatory agency, is to protect the public by taking them out of the regime,” Devlin said. “I think that process works very well.”

There are some practical reasons why not every criminal act described in an MFDA disciplinary hearing will result in a criminal charge. Harper, the acting staff sergeant with the Calgary Police economic crimes unit, said even with a client willing to press charges, it can be difficult to make a charge stick.

These corporate entities don’t want their dirty laundry aired in the media. Investor confidence, or client confidence, is everything
He believes that the more effective way of prosecuting salespeople found to be committing possibly illegal acts is for their financial institutions — the banks or investment groups that operate the funds — to bring the matter to police, instead of the MFDA. The bank or investment firm is, after all, another victim in a fraud case, but one with the ability to hand over valuable internal documentation.

However, Harper said he has rarely seen that happen in his nine years of experience with the financial crimes unit. Generally, these institutions opt to repay victimized clients and put the matter to rest more quickly.

“These corporate entities don’t want their dirty laundry aired in the media. Investor confidence, or client confidence, is everything,” Harper said. “If you lose that, you lose potentially millions of dollars in business.”

Neil Gross, executive director of the Canadian Foundation for the Advancement of Investor Rights (FAIR), pointed out the MFDA can proceed with enforcement hearings in situations where police can’t, such as when the accused cannot be found. Additionally, the MFDA makes findings based on a balance of probabilities — a lower standard than finding guilt beyond a reasonable doubt as criminal courts must do.

However, Gross said we should still be making every effort to bring people to justice.

“We certainly don’t want to be attracting a criminal element in Canada. We want there to be a sense this is a good place to set up shop,” he said. “There are good, sound policy reasons to make every effort to enforce criminal law.”

After Mark Lindsay’s victim and relative lost his money, he said people wondered how he could have allowed himself to be deceived. He now says he thinks he may have trusted too much in the system to protect investors at the time; today he doesn’t trust it at all.

“I’m not saying all agents are like this. There are bad apples in every pile,” Lindsay’s victim said. “But how do I know the guy sitting in front of me isn’t going to be one of them?”

Illustration by Mike Faille, National Post
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