MFDA alleges advisors broke fair dealing rules

The Mutual Fund Dealers Association of Canada has commenced a disciplinary proceeding in respect of W. H. Stuart Mutuals Ltd. (“W. H. Stuart”), Marilyn Dianne Stuart (“Dianne Stuart”) and Walter Howard Stuart (“Howard Stuart”) (collectively, the “Respondents”). Staff of the MFDA alleges in its Notice of Hearing, dated November 27, 2014 that the Respondents engaged in the following conduct contrary to the By-laws, Rules and/or Policies of the MFDA:

Allegation #1: Between March 26, 2003and May 2013, Dianne Stuart and W. H. Stuart solicited and accepted approximately $6 million from more than 180 clients purportedly to be invested on their behalf (the “Note Program”), which monies they used for the benefit of Dianne Stuart, W. H. Stuart and companies that they controlled and failed to repay or otherwise account for, thereby:

(a) failing to deal fairly, honestly and in good faith with the clients and engaging in conduct unbecoming a Member and Approved Person, contrary to MFDA Rule 2.1.1; and

(b) engaging in personal financial dealings with the clients which gave rise to a conflict or potential conflict of interest between the interests of Dianne Stuart and W. H. Stuart and the interests of the clients, which Dianne Stuart and W. H. Stuart failed to ensure was addressed by the exercise of responsible business judgment influenced only by the best interests of the clients, contrary to MFDA Rules 2.1.4 and 2.1.1.

Allegation #2: Between March 26, 2003 and May 2013, Dianne Stuart and W. H. Stuart actively concealed the activity in Allegations #1 and #3 from others at W. H. Stuart, external auditors, the MFDA and other regulators by:

(a) deliberately not recording transactions and other information about the Note Program in the books and records of W. H. Stuart;

(b) preparing records of the Note Program that were maintained separately from the records of W. H. Stuart (the Note Program Records) and actively concealed; and

(c) falsifying, altering, concealing and withholding documents, information and records on the W. H. Stuart back office system.

contrary to MFDA Rule 5, MFDA Policy No. 4 and MFDA Rule 2.1.1.

Allegation #3: Between March 26, 2003 and May 2013, in addition to failing to repay or otherwise account for the monies invested in the Note Program described in Allegation #1, Dianne Stuart and W. H. Stuart misappropriated or have otherwise failed to account for more than $800,000 of investments and monies from over 30 clients, those monies consisting of:

(a) cash balances in client accounts at W. H. Stuart that were not returned to the clients;

(b) the proceeds of authorized redemptions that were not deposited in client accounts or paid to clients;

(c) the proceeds of unauthorized redemptions that were not deposited in client accounts or paid to clients;

(d) monies that clients directed W. H. Stuart to transfer to other mutual fund dealers or financial institutions that W. H. Stuart did not transfer; and

(e) amounts withheld from redemptions in client accounts to pay taxes owing in respect of the redemptions that were not remitted to the Canada Revenue Agency;

contrary to MFDA Rules 2.1.1 and 2.3.1.

Allegation #4: Dianne Stuart and W. H. Stuart failed to comply with interim orders of a Hearing Panel of the MFDA with respect to the matters in Allegations #1 and #3 above, contrary to section 22.1 of MFDA By-law No.1 and MFDA Rule 2.1.1.

Allegation #5: Between March 26, 2003 and May, 2013, in the course of sustaining the Note Program described in Allegation #1, Dianne Stuart and W. H. Stuart failed to:

(a) file accurate and complete monthly Form 1’s and annual audited Form 1’s for W. H. Stuart with the MFDA, contrary to MFDA Rules 3.5.1 and 2.1.1 and MFDA Policy No. 4;

(b) ensure that W. H. Stuart maintained the minimum capital required of a Level 4 dealer, contrary to MFDA Rule 3.1.1;

(c) segregate cash and other property of W. H. Stuart’s clients from W. H. Stuart’s own property, contrary to MFDA Rules 3.3 and 2.1.1 and MFDA Policy No. 4;

(d) implement adequate internal controls, contrary to MFDA Rule 2.9; and

(e) ensure accurate financial records were maintained by W. H. Stuart, contrary to MFDA Rule 5, MFDA Policy No. 4 and MFDA Rule 2.1.1.

Allegation #6: Commencing November 21, 2012, Howard Stuart failed to cooperate during the course of an investigation by failing to attend an interview requested by Staff to provide a statement and give information about the matters under investigation, contrary to section 22.1 of MFDA By-law No. 1 and MFDA Rule 2.1.1.

The first appearance in this proceeding will take place by teleconference before a Hearing Panel of the MFDA’s Central Regional Council on January 6, 2015, at 10:00 a.m. (Eastern), in order to schedule a date for the commencement of the hearing on the merits and to address any other procedural matters. The appearance will take place in the MFDA hearing room located at 121 King Street West, Suite 1000, Toronto, Ontario, and will be open to the public, except as may be required for the protection of confidential matters. The Hearing on the Merits will take place in Toronto, Ontario.