Thierry Gevaert and Hav-Loc Private Wealth Partners Inc. – s. 26(3)
In the Matter of the Application for Reactivation
of Registration by Thierry Gevaert
as an Officer of Hav-Loc Private Wealth Partners Inc.
Opportunity to be Heard by the Director
Section 26(3) of the Securities Act
of Registration by Thierry Gevaert
as an Officer of Hav-Loc Private Wealth Partners Inc.
Opportunity to be Heard by the Director
Section 26(3) of the Securities Act
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Date of decision:
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January 28, 2009
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Director:
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Marrianne Bridge, CA, Manager, Compliance,
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Ontario Securities Commission (OSC)
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Verbal arguments by:
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Michael Denyszyn, Legal Counsel, Registrant Legal
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Services for the staff of the OSC
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Matthew C. Scott, Crawley Meredith Brush LLP
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for Thierry Gevaert (Gevaert)
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1. In November 2008, OSC Registrant Regulation staff advised Gevaert that it had recommended to the Director that his application for reactivation of registration as an officer of Hav-Loc Private Wealth Partners Inc. (Hav-Loc) be refused.
2. Pursuant to section 26(3) of the Securities Act (Ontario) (Act), Gevaert is entitled to an opportunity to be heard before a decision is made by the Director. Gevaert requested a verbal opportunity to be heard (OTBH), which occurred on January 14, 2009. My decision is based on staff counsel’s arguments, Gevaert’s counsel’s arguments, the testimony of Gevaert, and my reading of the documentary evidence referred to at the OTBH.
3. I have set out staff’s recommendation first, analyzed each of staff’s reasons for recommending refusal of reactivation of registration, set out the general requirements for registration and concluded with my decision and reasons.
Staff’s recommendation to the Director
4. Gevaert was previously registered with the OSC as a mutual fund salesperson with Quadrus Investment Services Ltd. (Quadrus), a wholly owned subsidiary of London Life. He was employed by Quadrus from August 1997 to July 2003 and registered with the OSC during the same period. Gevaert resigned from Quadrus in 2003. Staff alleges that his resignation was for cause.
5. In February 2008, Gevaert filed an application for reactivation of registration as an officer of Hav-Loc, a newly formed limited market dealer (LMD).
6. In November 2008, staff advised Gevaert that it had recommended to the Director that his application for reactivation of registration as an officer of Hav-Loc be refused on the basis that he lacked the integrity required of a securities professional and he was therefore unsuitable for registration. Staff’s recommendation was based on several factors:
- Gevaert’s prior involvement with The Institute For Financial Learning (IFFL) and his recent involvement with individuals previously associated with IFFL
- Hav-Loc’s unregistered trades of securities of “CV” Limited Partnership (CV) to six Ontario residents and
- Gevaert’s misrepresentations on both Item 11 Previous Employment and Item 12 Resignations and Terminations in his registration reactivation application
- “warning letter” from the Mutual Fund Dealers Association (MFDA)
- letter to the OSC from the Alberta Securities Commission (ASC) indicating that they are investigating Hav-Loc and that Gevaert is a potential respondent in that matter and
- letter from the Financial Planners Standards Council (FPSC) to the OSC regarding Gevaert’s unauthorized use of “CFP marks”
8. To the extent possible, I have set out staff’s arguments and the applicant’s response together and have indicated where their arguments agreed and where they differed. I have also set out my views on each argument raised. My views on the totality of the arguments are included with my decision below.
IFFL
9. The allegations with respect to Gevaert’s prior association with IFFL (and its representatives) and the implications of that association on suitability for current reactivation of registration were some of the more serious allegations discussed during the OTBH. There were two primary issues I needed to address in making my decision. First, IFFL and certain of its representatives have a long and troubled regulatory history. Although Gevaert was not named in any of these proceedings, he was a “structuralist” and later a regional manager of IFFL. Is that association sufficient that my consideration of his reactivation of registration application should be negatively impacted? Second, should the recent involvement of individuals related to IFFL and to Hav-Loc in investments promoted by Hav-Loc to its clients impact Gevaert’s application for reactivation of registration?
10. IFFL was founded in 2003 by Milowe Brost. Gevaert met Brost in 2002 through a predecessor company to IFFL (IFFL and its predecessor company are both referred to as IFFL in this decision). After attending some IFFL workshops, Gevaert joined IFFL as a member and later because a structuralist (2004). Gevaert was also later a regional manager of IFFL. A structuralist is an independent contractor that solicits members for IFFL. A structuralist also “services” the members solicited. Being a structuralist entitled Gevaert to higher and different levels of fees from IFFL operations. Gevaert testified that he told his regional manager about his IFFL involvement and that he didn’t want to hear anything about it. He did not discuss his involvement with IFFL with anyone else at London Life or Quadrus until his resignation.
11. IFFL has a long and troubled regulatory history. The ASC found in 2007 that IFFL and certain named representatives of IFFL, among other things, made false and misleading statements in offering memoranda, traded in securities without registration, distributed a prospectus that hadn’t been receipted by the ASC, acted as investment adviser without registration, and engaged in fraud. Significant sanctions were imposed. The State of Washington Department of Financial Institutions, Securities Division found in 2008 that IFFL and certain named representatives conducted registerable activity without being registered. Again, significant sanctions were imposed. The Saskatchewan Financial Services Commission also conducted a proceeding, made a finding of guilt and imposed sanctions.
12. According to a 2005 letter from IFFL to OSC staff, “The IFFL as an organization is not in the business of trading or selling Securities, we are however in the business of providing Workshops and disseminating information. This empowers a potential Member to understand and exploit many existing business opportunities for profit.” I was also directed to an undated letter to IFFL members listing potential investments in listed entities, some of which were non-arm’s length to IFFL. Staff’s characterization of this letter is that IFFL was inducing members to purchase specific securities and that as a structuralist with IFFL, Gevaert was also inducing members to purchase specific securities. This, staff argues, is directly relevant to Gevaert’s current registration reactivation application.
13. Staff also directed me to extracts of Hav-Loc’s website which had been reactivated within hours of the OTBH following several weeks of not being available including:
“ [Hav-Loc] is unique to our competition by being able to investigate and develop private equity investments in a variety of industries. Hav-Loc does not own these companies, so there will never be any opportunity for a conflict of interest to arise.”14. I was also directed towards several offering memoranda provided by Hav-Loc relating to investments that it promoted or was currently promoting. All of the entities appear to be currently or recently related in some way to individuals formerly associated with IFFL or currently or recently associated with Hav-Loc and thus staff is concerned that Hav-Loc is or has been promoting investments in related entities. None of the individuals named below as being associated with IFFL appears to have been involved in any way in the securities regulatory proceedings described in this decision.
15. The offering memorandum of “FQ” Limited Partnership discloses that “M” is the Director and President of the general partner of FQ. M was until quite recently the Director of Operations of Hav-Loc and was the designated compliance officer of Hav-Loc in its registration application. Gevaert testified that M resigned from his position in Hav-Loc before the FQ deal was put together so there is no conflict. Gevaert also testified that M has no current interest in Hav-Loc and neither Gevaert or Hav-Loc has an interest in FQ.
16. The offering memorandum of CV, a real estate limited partnership, discloses that “L” is the President of the General Partner of CV. His principal occupation is described as being Managing Partner of “L Inc.”, and real estate is set out as his special expertise. L was referred to in The State of Washington Department of Financial Institutions, Securities Division decision above as an IFFL related business entity that assisted Washington residents in setting up a Canadian trade name through which to join IFFL. L is also the auditor in the Hav-Loc registration application (Hav-Loc has apparently since changed its auditor). In the offering memorandum of “PM”, L is shown as being the President of PM.
17. Gevaert testified that L is not involved in Hav-Loc’s operations in any way. With respect, I don’t agree. L was the auditor in Hav-Loc’s registration application and he’s also involved in the promotion/facilitation of some of the investments sold by Hav-Loc. Lastly, Gevaert testified that L incorporated Hav-Loc (although, as below, according to the Hav-Loc incorporation documents “O” did this as agent).
18. In the offering memorandum of “GP” Limited Partnership, O is shown as being the President of the General Partner of GP. O is also a Director of CV and was Hav-Loc’s agent on incorporation.
19. Despite the testimony of Gevaert that he regretted his involvement with IFFL, I found it troubling that he has recently been and continues to be associated with the same individuals that he was associated with or met through IFFL. Although Gevaert was not named in any of the completed regulatory proceedings against IFFL, he was a structuralist and a regional manager with IFFL. Gevaert’s counsel argues that it is unfair and improper for me to deny registration solely [emphasis added] in reliance on the IFFL matters discussed here. I agree that it is not appropriate for me to rely solely on the IFFL matters in making my decision. The IFFL matters were not the only matters that resulted in the staff determination to deny registration. So while I would not deny Gevaert’s application for registration solely on the IFFL matters discussed here, I find that his recent association with individuals formerly associated with IFFL (even if these individuals were not the individuals sanctioned by the securities regulators) does negatively impact his application for reactivation of registration as an officer of Hav-Loc.
20. Gevaert’s counsel also argued that there is no evidence that Gevaert’s conduct has been or is in breach of securities laws in Ontario or elsewhere. With respect, I disagree. My view is that Gevaert was not in compliance with MFDA Rule 1.2.1(d)(iii) relating to outside business activities of an Approved Person when he was employed by Quadrus and accepting varying types and levels of fees from IFFL.
Hav-Loc’s unregistered trades
21. From April 2008 to June 2008, Hav-Loc sold securities of CV to six Ontario residents for total proceeds of $47,000. Hav-Loc was not and is not registered to sell securities to Ontario residents. There is no dispute on this issue. In July 2008, Gevaert sent a letter to all “senior associates” of Hav-Loc directing them to stop marketing to Ontario clients immediately until Hav-Loc obtained its LMD registration in Ontario.
22. An additional related issue that troubled me in connection with these unregistered trades was that Gevaert testified that he didn’t know whether Hav-Loc had promoted securities of any other limited partnerships referred to in this OTBH to Ontario residents. As the 100% owner, President, Chief Executive Officer and Director of Hav-Loc, I would have expected him to be fully aware of whether further illegal distributions of securities were made to Ontario residents.
Gevaert’s registration application misrepresentations
23. Item 11 of the registration application deals with previous employment. In Item 11, Gevaert disclosed that he was with London Life from March 1998 to January 2002. The information with respect to his employment at London Life is totally incorrect – both in terms of the name of his registrant-employer and his start and end dates with the registrant. Gevaert attributes these errors to law office errors. He also testified that his pay cheques came from London Life and thus it was reasonable for him to show his employer as London Life and not Quadrus. I concluded that the errors in Item 11 were a result of sloppiness in completion of the form and the review by Gevaert of the completed form, and likely not an intention to deceive.
24. Item 12 of the registration application deals with resignations and terminations. In question 1, Gevaert answers “no” to the question: “Have you ever resigned or been terminated following allegations made by a client, sponsoring firm, self-regulatory organization, securities regulatory authority or any other regulatory authority that you: (a) violated investment-related statutes, regulations, rules or industry standards of conduct?”
25. As part of his employment with Quadrus from 1997 to 2003, Gevaert was required to sign their code of business conduct. He testified that was generally aware of the contents of the code of business conduct. An extract from the code is set out below:
“While sponsored by Quadrus, you are permitted to trade only in products and services offered or approved by Quadrus.”26. In July 2003, staff received a Notice of Termination for Cause of Gevaert from Quadrus. Further information was subsequently received from Quadrus and an affidavit was filed by Gevaert. The Notice of Termination states that Gevaert resigned for cause because he was engaging in unauthorized sales activities and because he was in violation of their code of conduct. Quadrus apparently became aware of Gevaert’s activities following transfers of funds out of Quadrus or London Life accounts by Gevaert’s customers.
27. Gevaert testified that he was not aware until documents were exchanged prior to this OTBH that Quadrus had filed documents with the OSC indicating that his resignation from Quadrus was for cause. He indicated that he resigned when the potential conflict relating to his involvement with IFFL was pointed out to him. With respect, I didn’t find this testimony credible. Gevaert clearly acknowledged that he was aware that he was offside Quadrus’ code of conduct, that he was told by Quadrus that he was in conflict with the code, and that he was provided time to sell his book of business and was therefore not asked to resign immediately. Counsel argued that Gevaert didn’t have an opportunity to cross examine any of the witnesses that produced the documents filed by Quadrus with the OSC relating to the resignation for cause. He argues that Gevaert completed item 12 based on what he knew at the time he completed it – which, according to Gevaert’s testimony, did not include the fact that his resignation was for cause. I don’t accept the assertion that Gevaert was not aware that Quadrus had reported to the OSC – as required - his resignation as a resignation for cause.
28. Gevaert’s counsel also argued that it was reasonable for Gevaert to answer no to Item 12 because staff counsel had not proven that Quadrus’ code of conduct could reasonably be viewed as being the industry standard for conduct. I disagree. As above, my view is that Gevaert was not in compliance with MFDA Rule 1.2.1(d)(iii) relating to outside business activities of an Approved Person when he was employed by Quadrus and accepting varying types and levels of fees from IFFL. Thus with respect to an Approved Person engaging in outside business activities, I find that Quadrus’ code of conduct could reasonably be viewed as being the industry standard of conduct. As a result, I think a reasonable interpretation of the question being asked in Item 11 would result in Gevaert disclosing his resignation for cause from Quadrus.
MFDA warning letter
29. By letter dated December 12, 2008, the MFDA advised Gevaert that certain alleged conduct was in breach of MFDA Rule 1.2.1(d)(iii) relating to outside business activities of an Approved Person. Staff also alleges that Gevaert made a false statement to them regarding certain business activities of Hav-Loc. These types of letters are commonly referred to as “warning” letters. While there is some question as to the particulars of the activities discussed in the warning letter, as above, I am satisfied that Gevaert contravened MFDA rules by conducting outside business activities with IFFL while being an Approved Person at Quadrus.
Alberta Securities Commission investigation
30. In a December 2008 letter, the ASC confirmed to the OSC that Gevaert is a potential respondent in a current investigation of Hav-Loc. No further details are provided in the letter and few details were provided at the OTBH. Further information with respect to certain client files is being provided to the ASC by Gevaert in late January.
31. It was difficult for me to determine what weight to put to this investigation in making my decision. A confirmed investigation by another securities regulator into the conduct of a market participant is a serious event that should generally be given considerable weight in my decision. On the other hand, very limited information is available regarding what the investigation relates to or what the timing of the investigation might be. Until the matters underlying the investigation by the ASC are complete, however, my view is that the existence of the investigation alone is a matter that must be given serious consideration in making my decision.
Financial Planners Standards Council
32. By letter dated October 9, 2008, the FPSC advised the OSC that Gevaert was not currently licenced to use “CFP Marks” (i.e. the designation CFP, the words “Certified Financial Planner” or the CFP flame logo trademarks). Gevaert testified that he didn’t renew the CFP course and he therefore wasn’t licensed. The CFP Marks were subsequently deleted from the Hav-Loc website. I was unable to attribute this conduct to just sloppiness. In my view, the inappropriate use of an accreditation is a serious issue.
Suitability for registration generally
33. Subsection 25(1) of the Act generally requires that any person or company that trades in securities or advises others in securities investments be registered in the relevant category. A registrant is in a position to provide valuable services to the public, both in the form of direct services to individual investors and as part of the larger system that provides the public with the benefits of fair and efficient capital markets. 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 decisions by the Commission, other securities commissions and the courts, registration is a privilege, not a right.
34. Subsection 26(1) of the Act states that unless it appears to the Director that a registrant is not suitable for registration or that a proposed registration is objectionable, the Director shall renew the applicant’s registration. Therefore, the question for me to determine as Director in this matter is whether Gevaert, as applicant for officer of Hav-Loc, is suitable for reactivation of registration and/or whether Gevaert’s reactivation of registration is objectionable.
35. The meanings of “suitable” and “objectionable” for the purposes of section 26 of the Act are not set out in securities law. However, the Commission has over time and in a number of previous Director’s decisions, articulated three fundamental criteria for determining suitability for registration:
- Integrity, which includes honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities laws
- Competence, which includes prescribed proficiency and knowledge of the requirements of Ontario securities laws and
- Financial solvency, which is considered relevant because it is an indicator of a firm’s capacity to fulfill its obligations and can be an indicator of the risk that an individual will engage in self-interested activities at the expense of clients.
Objectionable
36. Subsection 26(1) draws a distinction between the Director’s determination whether:
- an applicant is suitable for registration or
- it is objectionable to permit the applicant to be registered.
- to provide protection to investors from unfair, improper or fraudulent practices and
- to foster fair and efficient capital markets and confidence in capital markets.
Relevance of past conduct
39. In the Charko case (Re Charko (1992), 15 OSCB 3989), the Commission said that “[in] assessing fitness for registration, the Director must necessarily place a strong reliance on an applicant’s past behaviour”. As well, it stated that “[s]uitability includes the totality of… [a Registrant’s]… past and present”.
40. In the Mithras case (Re Mithras Management Ltd., (1990) 13 OSCB 1600), the Commission stated 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 by having capital markets that are both fair and efficient. 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…”
41. As indicated in Charko and Mithras, the Director must necessarily place a strong reliance on an applicant’s past behaviour in assessing fitness for registration and must protect the public interest by removing from the capital markets those whose conduct in the past leads to the conclusion that their conduct in the future may well be detrimental to the integrity of the capital markets.
Registration objectionable
42. The Director also has the ability to determine whether a proposed reactivation of registration is objectionable on broader public interest grounds, regardless of the suitability determination.
Decision and reasons
43. After having heard the arguments of staff and Gevaert’s counsel and the evidence of Gevaert, it is my decision that the reactivation of registration of Gevaert as an officer of Hav-Loc should be refused. The factors listed in paragraphs 6 and 7 of this OTBH when taken together provide a sufficient and reasonable basis to deny the reactivation of registration of Gevaert on the basis that his past behaviour demonstrates that he lacks the integrity required of a securities professional. He is therefore unsuitable for reactivation of registration. I also find that the totality of his past conduct makes his registration objectionable.
44. Gevaert’s counsel argued that rather than denying reactivation of registration, I should impose terms and conditions. Staff counsel argues that terms and conditions cannot be used to shore up a fundamentally objectionable registration application. I agree with staff and find that it is not appropriate to reactivate the registration of Gevaert and then shore up what I consider to be a fundamentally objectionable registration application with terms and conditions.
45. Our 1991 Annual Report stated in part that “[the Registrant Regulation] section administers a registration system which is intended to ensure that all Applicants under the [Act]… meet appropriate standards of integrity, competence and financial soundness”. As well, I refer to the Director’s Decision in the matter of Leng Wilson Ng (Re Ng (2003), 25 OSCB 5485) which states that “[The] Director must only find that the applicant appears to be unsuitable and that is a different standard than section 127”. As in the matter of Ng, I find that Gevaert appears to be unsuitable for reactivation of registration.
46. As Director, I have limited power under section 26 of the Act to grant, renew or impose terms and conditions on registration based on suitability of the applicant or whether the registration is objectionable. The Commission has much broader powers including the ability to review this decision and make such other decision as the Commission considers proper.
Marrianne Bridge, CA,
Manager, Compliance, Ontario Securities Commission