Townend, Lance Cory - Opportunity to be Heard

Overview 

1. In September 2009, OSC staff recommended that Townend’s registration as a dealing representative in the categories of exempt market dealer (EMD), mutual fund dealer (MFD) and scholarship plan dealer (SPD) be subject to terms and conditions. Staff recommended that his activities be subject to strict supervision by his sponsoring firm, Global Maxfin Investments Inc. (Global), and that his registration continue on a month-to-month basis (collectively, the 2009 Terms and Conditions). The 2009 Terms and Conditions were imposed in October 2009.  

2. On April 30, 2010, staff advised Townend that it had recommended to the Director that his registration as a dealing representative in the categories of EMD, MFD and SPD not be renewed, starting May 2010.  

3. Pursuant to section 31 of the Securities Act (Ontario) (Act), Townend is entitled to an opportunity to be heard (OTBH) before a decision is made by the Director. Townend initially requested a written OTBH. Written submissions were filed by Staff on May 25 and June 28, and by Townend on June 14 and July 12. In Townend’s July submissions, he requested an in person OTBH. The in person OTBH (part of which was held in camera) was held on July 29.  

4. My decision is based on the written submissions, my reading of the documentary evidence provided to me, the verbal submissions of both staff and Mr. Townend, and Mr. Townend’s testimony.  

5. I have set out the general requirements for registration, analyzed each of staff’s reasons for not recommending renewal of Townend’s registration (together with the applicant’s arguments on each point), and concluded with my decision.  

The Law

6. Section 25 of the Act generally requires that any person or company that trades in securities to be registered in the relevant category. A registrant is in a position to provide valuable services to the public. A registrant also has a corresponding capacity to do material harm to investors and to the public at large. Determining whether an applicant should be registered is thus an important component of the OSC’s public interest mandate. As well, as noted in numerous prior decisions, registration is a privilege, not a right. 

7. Subsection 27(1) of the Act states that, on application by a person, the Director shall register the person unless it appears to the Director that the person is not suitable for registration or that the proposed registration is otherwise objectionable.  

8. The question for me to determine as Director in this matter is whether Townend is suitable for registration and/or whether his registration is otherwise objectionable. 

9. Subsection 27(2) of the Act provides that in determining whether a person is suitable for registration, the Director shall consider whether the person has satisfied the requirements prescribed in the regulations relating to proficiency, solvency and integrity, and such other factors as the Director considers relevant.  

10. The meanings of “suitable” and “objectionable” are not prescribed in Ontario securities law. However, the Commission has, over time, articulated three fundamental criteria for determining suitability for registration: 

1. Integrity – which includes honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities law
2. Proficiency – which includes prescribed proficiency and knowledge of the requirements of Ontario securities law, and
3. Solvency

The criteria at issue here are integrity and proficiency. 

11. The purposes of the Act (as set out in section 1.1) are to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets.  

12. Prior Commission decisions have held that registration is “otherwise objectionable” if it is determined, with reference to the purposes of the Act, that it is not in the public interest for the person or company to be registered. For example, in Re Mithras Management Ltd., (1990) 13 OSCB 1600, the Commission held that: 

The role of this Commission is to protect the public interest by removing from the capital markets… those whose conduct in the past leads us to conclude that their conduct in the future may well be detrimental to the integrity of those capital markets… We are here to restrain, as best we can, future conduct that is likely to be prejudicial to the public interest… In so doing we must, of necessity, look to past conduct as a guide to what we believe a person’s future conduct might reasonably be expected to be…”  

Arguments relating to staff’s recommendation of non-renewal of Townend’s registration

Townend’s registration history

13. Townend was registered with the OSC as a dealing representative in the categories of MFD, EMD and SPD with Global from August 2004 to December 2005 and again from January 2006 until the present.  

14. In 2009, Staff became aware of allegations against Townend (among others) by former client “M”. M filed a motion in a Quebec court in July 2009. As a result of the issues related to M, the 2009 Terms and Conditions were imposed in October 2009.

15. Subsequently staff learned of unrelated allegations against Townend. On April 30, 2010, staff of the OSC advised Townend that they had recommended to the Director that his registration as a dealing representative in the categories of EMD, MFD and SPD not be renewed, beginning with the month of May 2010.

Summary of staff’s position

16. Staff submits that Townend’s registration should not be renewed on the grounds that he is unsuitable for registration and that his continued registration would be objectionable.  

17. Staff’s recommendation is based on Townend’s conduct with respect to three former clients – M, “J”, and “A” Inc. All three clients lost their investments in what turned out to be fraudulent issuers. There is no dispute between staff and Townend that his clients lost all or most of their investments. What is in dispute is Townend’s conduct with respect to these clients.  

18. Staff submits there is a four part pattern to each of the three client matters; 

1. All three clients lost their entire investment by investing in fraudulent issuers
2. Townend attempts to avoid responsibility for his clients’ losses by impugning their credibility
3. Townend attempts to avoid responsibility by denying that he solicited his clients’ investments, and
4. Townend fails to perform basic due diligence on investments his clients purchase (generally known as the know your product obligation)

Each client matter will be discussed separately below. 

19. Staff also submits that it is not appropriate for Townend to act outside of his registration category and to attempt to “cure” that by having clients sign “disclaimer forms” acknowledging that he is not able to sell the investment to them under his registration category. Staff further submits that none of the three clients would have invested in the three fraudulent companies without the involvement of Townend. Townend submits that the “disclaimer forms” were in fact “referral arrangements” and that he was not intending to contract out of his responsibility to his clients by having them sign these documents.  

20. Townend also acknowledged that he no longer does these types of “referrals” because he now understands the concept of acts in furtherance of a trade and how his conduct can result in him promoting a security when he doesn’t think he is.  

21. Staff argues that the 2009 Commission settlement agreement in the matter of Shallow Oil & Gas Inc. stands for the proposition that the OSC must be able to act to prevent further harm because of outstanding claims. The claims do not need to have been resolved. The test is whether there is “credible evidence of harm”. In this case, staff argues that three of Townend’s clients lost their investments as a result of fraud at the underlying issuers and that there is credible evidence of harm resulting from Townend’s conduct. If there is credible evidence of harm, staff argues that Townend is not suitable for registration and that his ongoing registration is objectionable.

22. Lastly, staff referred me to the Director decision in Re Craig Alan Jaynes, (2000) 23 OSCB 1543 which states in part that “[w]hile terms and conditions restricting registration may be appropriate in a wide variety of circumstances, they should not be used to shore up a fundamentally objectionable registration”. Staff submits that there are no terms and conditions that would be appropriate in these circumstances and that the only appropriate remedy for Townend’s conduct is to deny registration.

M matter

23. The M matter resulted in the imposition of the 2009 Terms and Conditions on consent by Townend. 

24. M is in his late 70s. M claims he invested in Progressive Management Ltd. (PML), a Bahamas based company, on the advice of Townend. PML was a fraudulent issuer and M lost his investment. 

25. The court action in this matter is still pending. The conduct in debate relates to whether:

1. Townend advised M to make the investment in PML, and
2. Townend’s conduct constituted acts in furtherance of a trade of PML securities

26. While Townend denies providing advice to M, he does acknowledge providing a contact number for PML to M. He also acknowledges that M asked him what he was invested in personally and that Townend told M he had invested in PML. Townend argues that the PML investment presented to M was not as an endorsement or suggestion, but merely one of a number of possible investments he might consider. He further argues that the PML suggestion was not given as advice and that, as a result, he did not obtain a signed disclosure form from M. Lastly, Townend advises that because he did not solicit M’s investment in PML, normal procedures and risk analysis were not performed.

27. In M’s examination before the Quebec courts, he states several times that Townend told him PML was a good investment and that that was the only reason he invested in it. Until his conversation with Townend, M claims not to have heard of PML.

28. Based on my understanding of the available information in the M matter, I do not believe that Townsend acted appropriately with respect to M’s investment in PML. Townend is not licensed to sell PML securities under his registration and should not have suggested an investment in PML, provided PML’s contact information to M, nor advised M that he had a personal investment in PML. As well, even if Townend was licensed to sell PML securities under his registration, I don’t believe that he did sufficient (or perhaps any) due diligence on PML, which would be necessary for him to meet his know your product obligation.

J matter

29. J is in her mid 70’s. She became a client of Townend in 2003. Townend advised that J asked him about alternative investments in 2006 when she became unhappy with her mutual fund portfolio return. Townend discussed a number of alternatives with her including bonds, GICs, etc. Townend said that because he had “knowledge of… DBI” Financial Network Inc. (DBI), he told her about it. J claims that she privately loaned $60,000 (at 9%) to “S” and DBI. DBI was a fraudulent issuer and J lost her investment.

30. In her claim, J characterizes S as a business partner of Townend. She supports this characterization by reference to a referral/introduction letter dated April 2006 which S, J and DBI signed. As an aside, Townend referred to this referral/introduction letter as “disclosure” and not an attempt by him to contract out of his responsibility.

31. Townend acknowledges that S told him about a company that provided collateralized loans paying double digit interest rates. He also acknowledges that although he told S that he was not licensed for this type of investment, S and Townend discussed the referral of possible clients to each other. Townend states that he told S that there could be no solicitation, nor compensation paid to him.

32. Following these “mutual referral” conversation(s), Townend advised that he started to consider making an introduction between S and J. He then met again with S, following which he met with J to see if she was interested in meeting with S. Townend says that he explained to J that an investment in DBI was outside his registration category and that if she wanted to invest in DBI, it would be her decision alone. In order for J to invest in DBI, she met with Townend in order to liquidate some of her mutual fund investments.

33. At the subsequent meeting among J, Townend and S, J signed the referral/introduction letter referred to above. At that meeting, J loaned $60,000 to DBI. Starting in about 2008, DBI went into default on its loan payments.

34. The J allegations also contain some troubling allegations with respect to a disbarred Quebec lawyer – “R”. R resigned from the Le Barreau du Quebec in 2005. He has been the subject of at least seven complaints filed with the Barreau. At his 2008 disciplinary proceedings, allegations of embezzlement, preparing forged invoices and acting on a client’s behalf with authorization were raised. These public hearings attracted the interest of the Quebec press. R was found guilty of eight counts of professional misconduct and permanently disbarred in September 2009.

35. J alleges that R and Townend met with her multiple times in 2008 at her home to discuss recovery of her lost investment in DBI. She alleges that R held himself out as a lawyer at these meetings and that R and Townend presented her with numerous falsified documents in respect of a DBI bankruptcy proposal which purported to set out terms under which J would be repaid.

36. Staff alleges that R and Townend have a business relationship as evidenced by an e-commerce website that shows them as being business associates. While Townend denies the business relationship, he acknowledges being an acquaintance and a friend of R. As well, he travelled with R on a business trip to China. However, Townend claims that he did not know that R had been disbarred or that he was facing professional disciplinary proceedings (although he does acknowledge that he knew that R was not a practicing attorney). As well, Townend acknowledges that he hired R after J asked Townend for his help in finding a lawyer.

37. Sometime after J invested in DBI, Townend became suspicious of some of the documents provided by R and tried to independently verify them with a lawyer. He then determined that the documents were fraudulent. Townend also claims that some time after this he found out that R had been disbarred.

38. I find the facts of the J matter much more troubling that the facts of the M matter. Based on my understanding of the available information in the J matter, I do not find the account provided by Townend to be credible. I also don’t find it credible that Townend was not aware that R had resigned from the Barreau and was therefore not able to provide legal advice to J or others. In my view, the only reasonable interpretation of the facts as I know them is that Townend, together with S, solicited the loan from J for DBI and S. As well, I don’t believe that he did sufficient (or perhaps any) due diligence on DBI, which would be necessary for him to meet his know your product obligation.

A matter

39. This matter relates to a law suit filed in a Quebec court between “A” Inc. (A) and “T” Limited Partnership (T) et al. Townend is not named in the law suit. According to the Vice President and General Counsel of A, the only reason that Townend wasn’t named in the law suit is because A didn’t think that he had any resources.

40. A, a U.S. based company, retained Townend as the “investment manager of [A’s] employee retirement plan”. With A’s authorization, Townend invested $150,000 of the pension fund’s assets in T in 2005. Townend claims that he did not “push” the investment in T on A, rather that he made them aware of it only.

41. By document dated 2005, A stated that “in no way shape or form [was A] sold the investment [in T] by [Townend]. [Townend] holds a license in mutual funds and therefore cannot sell [T], but rather has referred [A] to the General Partner”. “Due diligence is therefore requisite by [A] prior to making the decision to participate in [T]”.

42. In 2007, A indicated that it wished to liquidate its investment in T. However, A did not receive any money from T. In July 2009, A successfully obtained judgment against T for $150,000 plus interest.

43. Again in this matter, I find Townend’s conduct questionable. Based on my understanding of the facts in this matter, I do not find Townend’s account of his conduct credible. In my view, he, at a minimum, facilitated the investment by A in T without doing any due diligence on T.

Decision

44. After having read and heard the arguments of staff and Townend’s counsel, it is my decision that the registration of Townend should not be renewed. In my view, as set out in further detail above, based on his past conduct with former clients M, J and A, Townend is not suitable for registration and his ongoing registration is objectionable. In my view, each of these clients was solicited by Townend to buy investments or make loans to companies that were outside of Townend’s registration category. As well, even if these investments and loans were within Townend’s registration, Townend performed no due diligence (know your product) to make sure the investments or loans were suitable for his clients. The result in each case was that each client lost all or most of its investment because the underlying issuer was fraudulent.