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  • Laura Bewick Howitt, CFA, CIPM, MBA

Bulletin: Canadian Regulators Enforcement Update - January 2024

CASES HIGHLIGHTED: FRAUD / MISLEADING STATEMENTS / FAILURE TO DISCLOSE


This bulletin presents a comprehensive update on recent enforcement actions undertaken by Canadian regulatory authorities, shedding light on cases of fraud, misleading statements, and failures to disclose.



CASE 1: FRAUDULENT INVESTMENT


On November 10, 2023, the Alberta Securities commission issued a Decision regarding defendant A.G. and the entities he controlled finding A.G. misappropriated over $3.4 million dollars of investor funds. A.G. and his father (now deceased) established a mutual fund trust on January 4, 2013 and issued an offering memorandum (OM) dated January 5, 2013 for the offer of Class “A” trust units (“the trust units”). Proceeds from the trust unit sales were to be invested in other entities controlled by A.G. and were to be used to fund real estate development projects.


Registered Exempt Market Dealer RFS agreed to offer the trust units to its clients (for an 8% commission) and recommended that the trust retain an independent research company FR to prepare a report. Between August 30, 2013 and May 7, 2014, about $4,250,000 was raised from the sale of the Class “A” trust units to about 207 primarily RFS investors. The funds were to be used acquire land to develop a shopping plaza. The investment was to provide a minimum 10% annual return based on income generated from tenants and a return on investment once the property was sold. Instead, in a complex series of transactions, A.G. misappropriated about $3.6 million for the benefit of himself, his family and other entities he controlled. The money was used for various personal and business purposes unrelated to the mutual fund trust. 


In the regulatory hearing, the CEO of RFS indicted that FR’s report had raised concerns including a “huge red flag” regarding past projects. To address these the CEO asked for additional terms such as returning investor capital and a 10% per annum hurdle rate before any profit share with management, and that management invest $500,00 in the trust units in addition to their $1,250,000 loan towards the land purchase. The CEO testified that, although requested, no audited financial statements were ever provided. In the fall of 2016, RFS learned through third-party sources that a related project developed by A.G. was in creditor arrangement proceedings.


Notwithstanding A.G.’s claims that he had not controlled and was unaware of the misappropriation of funds, the ASC concluded that by defrauding customers of $3,434,566 A.G. and the various entities he controlled breached s. 93 of the Alberta Securities Act.


Key Takeaways:


  1. The ASC has demonstrated a capacity to enforce - This case demonstrates the ASC’s ability to conduct and enforce on complex fraud cases involving multiple business entities. While A.G. pleaded ignorance of the transactions, ASC staff was able to demonstrate on the balance of probabilities that A.G. was directly involved in the fraud. Sanctions and cost recovery are yet to be assessed.

  2. EMDs must pay serious attention to red flags – While it’s easy to find fault in retrospect, it is likewise important to learn from past mistakes.  Notwithstanding its due diligence, there were “red flags” that might have alerted RFS of possible problems with the investment.  The requirements RFS put in place to address the “red flags” provided some assurance that investors would get paid before management, but they cannot prevent the fraudulent misappropriation of funds. Registrants must conduct thorough due diligence and report misconduct in support of reducing fraud. There is nothing to suggest in the Decision that the ASC holds RFS or its CEO responsible.


CASE 2: MISLEADING STATEMENTS / FAILURE TO DISCLOSE


In a June 2, 2023, settlement agreement with the BC Securities Commission, Executive Director D.M.A. agreed that his company “B” had provided misleading information in a news release issued June 8, 2018.  The release stated that B had raised a total of $5,403,384 through a private placement and would use the proceeds to advance certain company projects. B failed to disclose that it would only retain $947,321 for these purposes as it had already spent $4,456,063 on consulting fees. By announcing the total proceeds from the private placement, while failing to disclose that the company would retain less than 18% of the proceeds, B made a statement to investors that it knew or ought reasonably to have known was a misrepresentation contrary to section 50(1)(d) of the Act. As the company CFO, D.M.A. acquiesced to the contravention and thereby contravened the same section of the act by operation of section 168.2 of the securities act (BC).


In this case, D.M.A. admitted the misconduct prior to commencement of the hearing and agreed to pay $25,000 to the commission. He was required to resign any director or officer position held with any issuer or registrant and prohibited for three years of becoming a director or officer, acting as a promoter or advising or otherwise acting in a management capacity in connection with activities in the securities market.


Key Takeaways:


  1. Omitting important information is misrepresentation – D.M.A. and company B failed to disclose important material information in a news release. They acknowledged that they knew or ought reasonably to have known that this was misleading to investors.

  2. Misrepresentation will result in regulatory sanctions – Although D.M.A. entered into a settlement agreement prior to an enforcement hearing, he was prohibited from acting in virtually any capacity within the securities industry for three years.



CASE 3: CEASE TRADE ORDER, FRAUD, UNREGISTERED TRADING, ILLEGAL DISTRIBUTION


On September 1, 2023, the Ontario Securities Commission issued a temporary cease trade order (CTO) against TGG Inc. and its principal M.M.K. operating under ***forexfunds.com. The OSC view is that:

  • TGG was operating as a retail foreign exchange and commodities trading firm

  • TGG simulated trading to show profits for investors and may have used funds from other investors to pay the “profits”

  • TGG and M.M.K. may have engaged in fraud, may be engaged in securities trading without registration, may have distributed securities without filing a prospectus and may have provided false and misleading information to the commission.

  • On September 1, 2023, the CFTC issued a Release regarding a restraining order and asset freeze with a parallel investigation of TGG and M.M.K. operating under ***forexfunds.com. Briefly, the CFTC described the fraud as follows: TGG offered to help customers become professional traders by using TGG to trade against third-party liquidity providers and share in profits. In fact, TGG was the counterparty to the trades, minimized the chances of customers trading profitably by terminating customer accounts, assessing misleading commissions to reduce customer equity, using software to cause customer orders to execute at worse prices than appeared when the order was sent and handicapping the very small number of successful customers to decrease their profits.


Key takeaways:


  1. Fraudulent investment schemes are on the rise – While the allegations have not yet been proven, these types of fraudulent investment schemes are on the rise. Fraudsters are effectively leveraging social media and online advertising as well as other electronic forms of communication to solicit large numbers of potential customers with promises of extremely high returns. They then use various sophisticated means to defraud customers, while consistently inducing them to invest more.

  2. Try to Educate and warn clients – While victims of these fraudulent schemes are often encouraged to keep their activities secret, it may still be possible to warn clients or prevent them from incurring additional losses. Look for warning signs by:

 

  • Listening carefully and asking questions when clients mention trading on their own, especially when the trading involves complex products such as binary options, cryptocurrency or Forex

  • Watching for sudden withdrawals and clients either not saying what they plan to do with the money, moving the money to cryptocurrency or wiring it to a non-reputable company

  • Googling the company or trading platform name as there are often already other customers posting about their negative experiences

  • Verifying that the company is duly registered to provide investment services in the relevant provincial jurisdiction.

 

Prepared by SGD Compliance Consulting in conjunction with David Borenstein, President, Borenstein Consulting Inc. Expert in Securities Industry and Regulatory Investigations, Policy Development and Training.


No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission of the copyright holder.

 

This article was prepared for informational purposes only and is not intended to provide, and should not be relied on for specific advice. You should not act upon the information in this article without an independent assessment of the law or regulations applied to the facts of your situation.

 

SGD Compliance Consulting Inc. is not responsible for the content of websites and information resources that may be referenced in the article. Reference to these sites or resources does not constitute an endorsement by SGD Compliance Consulting Inc. of the information contained therein. Although we have endeavored to ensure that the information contained in this article has been obtained from reliable and up-to-date sources, the changing nature of statistics, laws, rules, and regulations may result in delays, omissions, or inaccuracies in information contained in this article.

 

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