Securities Law & Instruments

In the Matter of the Registration of
Douglas Allan Lawson

Staff’s Recommendation Regarding Imposition
of Terms and Conditions on Registration
Subsection 27(3) of the Securities Act, R.S.O. 1990, c. S.5



Date of decision: August 16, 2012
Director: Marrianne Bridge
  Deputy Director,
  Compliance and Registrant Regulation
  Ontario Securities Commission
   
Written Submissions by: Michael Denyszyn, Senior Legal Counsel
For staff of the Ontario Securities Commission
   
  And
   
  Michael Meredith, Crawley Meredith Brush LLP
Counsel for Mr. Lawson

Introduction

On October 7, 2010, Douglas Allan Lawson advised Staff (Staff) of the Ontario Securities Commission (the OSC) in writing that he intended to surrender the registration of Wealth Advisory Services Ltd. (WAS), where he acted as chief compliance officer and sole dealing representative in the categories of mutual fund dealer and exempt market dealer, and to seek registration as a dealing representative in the category of mutual fund dealer, sponsored by IPC Investment Corporation (IPC).  Mr. Lawson formally applied for registration with IPC on July 27, 2012 (the Application).

In its review of the Application, Staff considered information from the Mutual Fund Dealers Association of Canada (the MFDA) in respect of Mr. Lawson’s conduct while sponsored by WAS.  WAS applied on July 27, 2012 to surrender its registration as a dealer in the categories of mutual fund dealer and exempt market dealer. 

Staff and Mr. Lawson have agreed to resolve the Application through a joint recommendation that: (i) Staff will not recommend that an application by Mr. Lawson for registration as a dealing representative with IPC in the category of mutual fund dealer be refused unless Staff becomes aware after the date of this joint recommendation of conduct impugning Mr. Lawson’s integrity, proficiency or solvency; (ii) Mr. Lawson’s registration be subject to strict supervision by IPC for a period of one year; and (iii) Mr. Lawson’s registration be subject to terms and conditions requiring Mr. Lawson to successfully complete, and provide proof thereof, the Canadian Securities Course (CSC) offered by CSI Global Education Inc. by no later than August 1, 2013.

Agreed Statement of Facts

Staff and Mr. Lawson agree with the facts contained in the “Agreed Facts” section of the MFDA Settlement Agreement in Re Douglas A. Lawson, which is reproduced in its entirety at Schedule A to this joint recommendation.

Joint Recommendation

Staff and Mr. Lawson jointly recommend that in light of the facts agreed to above, and of the sanctions imposed by the MFDA, the appropriate conditions to address the agreed facts in this case are that:

(i) Staff will not recommend that an application by Mr. Lawson for registration as a dealing representative with IPC in the category of mutual fund dealer be refused unless Staff becomes aware after the date of this joint recommendation of conduct impugning Mr. Lawson’s integrity, proficiency or solvency;

(ii) Mr. Lawson’s registration will be subject to strict supervision by IPC for a period of one year from the date hereof; and

(iii) Mr. Lawson’s registration will be subject to terms and conditions requiring Mr. Lawson to successfully complete, and provide proof thereof, the CSC by no later than August 1, 2013.

Staff and Mr. Lawson submit that their joint recommendation is reasonable in light of the considerations identified by the Commission in decisions such as Re Al-tar Energy Corp. (2011), 34 O.S.C.B. 447.

Acknowledgements

  1. Mr. Lawson acknowledges that if the Director accepts this joint recommendation:
    1. He agrees to waive all rights to a full hearing, judicial review, or appeal of this matter; and
    2. A copy of the Director’s decision accepting this joint recommendation, which may include reference to all or part of the agreed statement of facts, may be published on the OSC website and in the OSC Bulletin;
  2. Staff and Mr. Lawson acknowledge that if the Director does not accept this joint recommendation:
    1. This joint recommendation and all discussions and negotiations between Staff and counsel for Mr. Lawson in relation to this matter shall be without prejudice to Staff or Mr. Lawson; and
    2. Mr. Lawson will be entitled to all available proceedings in relation to Staff’s recommendation should Staff recommend that the Application be refused or made subject to terms and conditions.

“Michael Denyszyn”

 

“Douglas Allan Lawson”

Michael Denyszyn, Senior Legal Counsel,
Compliance and Registrant Regulation

 

Douglas Allan Lawson

 

 

 

August 15, 2012

 

August 15, 2012

Date

 

Date


 

* * *
Having reviewed and considered the agreed statement of facts, representations, and submissions contained in this memorandum, I, Marrianne Bridge, in my capacity as Director under the Securities Act (Ontario):

                        “x”      Accept the joint recommendation of the parties, and hereby order that Douglas Allan Lawson’s application for reactivation of registration as a dealing representative in the category of mutual fund dealer, sponsored by IPC Investment Corporation (IPC), is granted.  I make this order on the express understanding that:

  • Staff will recommend, and Mr. Lawson and IPC will accept, that Mr. Lawson’s registration will be subject to strict supervision by IPC for a period of one year from the date hereof; and

 

  • Staff will recommend, and Mr. Lawson and IPC will accept, that Mr. Lawson’s registration be subject to terms and conditions requiring Mr. Lawson to successfully complete, and provide proof thereof, the Canadian Securities Course (CSC) offered by CSI Global Education Inc. by no later than August 1, 2013.

                        ___      Do not accept the joint recommendation of the parties.

                                                                                                “Marrianne Bridge”                                                                                                   Marrianne Bridge
Deputy Director, Compliance and Registrant Regulation
Ontario Securities Commission


SCHEDULE A

                        Settlement Agreement
                                                                                                                      File No. 200907

 

IN THE MATTER OF A SETTLEMENT HEARING
PURSUANT TO SECTION 24.4 OF BY-LAW NO. 1 OF
THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Re: Douglas A. Lawson

 

Settlement Agreement

I. INTRODUCTION

1. By Notice of Settlement Hearing the Mutual Fund Dealers Association of Canada (the “MFDA”) announced that it proposed to hold a hearing to consider whether, pursuant to section 24.4 of By-law No. 1, a hearing panel of the MFDA Central Regional Council (the “Hearing Panel”) should accept the settlement agreement (the “Settlement Agreement”) entered into between staff of the MFDA (“Staff”) and the Respondent, Douglas Lawson (“Lawson”).

II. JOINT SETTLEMENT RECOMMENDATION

2. Staff conducted an investigation of Lawson’s activities. The investigation disclosed that Lawson had engaged in activity for which Lawson could be penalized on the exercise of the discretion of the Hearing Panel pursuant to s. 24.1 of By-law No. 1.

3. Staff and Lawson recommend settlement of the matters disclosed by the investigation in accordance with the terms and conditions set out below. Lawson agrees to the settlement on the basis of the facts set out in Parts IV and V herein and consents to the making of an Order in the form attached as Schedule “A”.

4. Staff and Lawson agree that the terms of this Settlement Agreement, including the attached Schedule “A”, will be released to the public only if and when the Settlement Agreement is accepted by the Hearing Panel.

III. ACKNOWLEDGEMENT

5. Staff and Lawson agree with the facts set out in Parts IV and V herein for the purposes of this Settlement Agreement only and further agree that this agreement of facts is without prejudice to Lawson or Staff in any other proceeding of any kind including, but without limiting the generality of the foregoing, any proceedings brought by the MFDA (subject to paragraph 53 below) or any civil or other proceedings which may be brought by any other person or agency, whether or not this Settlement Agreement is approved by the MFDA.

IV. OVERVIEW

6. Wealth Advisory Services (“WAS”) is a Member of the MFDA. Lawson is and was at all times a salaried employee of WAS. Lawson is the President and Secretary of WAS, its only salesperson and its Compliance Officer. Promittere S & P 500 Limited (“Promittere”) was a non-arm’s length company to WAS by virtue of common ownership at the time the Promittere product described herein was launched. Robert J. Thiessen (“Thiessen”) is the director of Promittere and the controlling mind of both WAS and of Promittere. WAS is wholly owned by Promittere Capital Group Limited Partnership, which at all material times was owned 70% by Thiessen through wholly-owned corporations. The remaining 30% was at all material times owned directly, indirectly or beneficially by members of Thiessen’s family. In the ordinary course of activities at WAS, Lawson reported to and acted under the direction of Thiessen.

7. Between August 2002 and November 2005, Lawson sold shares of Promittere to clients of WAS as a means of investing in S&P 500 Futures Index Contracts and other similar instruments on the Chicago Mercantile Exchange. The trading in respect of Promittere was to be managed by G.H. Lewis & Associates (“G.H. Lewis”). In total, 48 clients of WAS invested $2,883,993 USD (in 39 accounts) in shares of Promittere on the advice of Lawson. As a result of these sales, Lawson earned fees of approximately $50,000 CDN paid to him through WAS in the form of shares in Promittere. Upon the collapse of Promittere, Lawson’s shares were cancelled and he has not participated in and hereby undertakes that he will not participate in any pro rata recovery paid to shareholders.

8. In September of 2006, Lawson was informed that a fraud had occurred and that Promittere could not account for WAS-client funds. Gordon H. Lewis (“Lewis”), the principal of G.H. Lewis, was subsequently charged with fraud and theft by the Metropolitan Toronto Police Force. On September 14, 2009, Lewis plead guilty to a fraud charge and was sentenced to 12 months under house arrest.

V. AGREED FACTSLawson’s History with Thiessen

9. Thiessen is a chartered accountant. From 1983 to 1993, Thiessen was a senior executive at Equion Securities Ltd (“Equion”). Lawson joined Equion in January 1985 as a Manager of Corporate Services. Lawson understood that Thiessen, along with Equion’s president at the time, was the creator of virtually all of Equion’s investment products.

10. Lawson remained employed at Equion until December 31, 1994. Based on his 10 years at Equion, Lawson perceived Thiessen to be a skilled professional, specifically with respect to the creation of investment products.

11. In 1993, Thiessen left Equion to set up his own company, Promittere Securities Ltd., to create investment products. As set out in paragraph 13 below, Promittere Securities Ltd. was registered in Ontario as a limited market dealer and a securities dealer.

12. Lawson joined Thiessen in January of 1995 as a salaried employee of Promittere Securities Ltd. Lawson has been registered as the sole salesperson and the President, Secretary, and Compliance Officer of Promittere Securities Ltd. (and its successors) since 1995, as set out in paragraph 14 below.

Registration History

13. Between January 19, 1993 and October 1, 1999, WAS carried on business as Promittere Securities Ltd. Between June 1, 1993 and December 22, 1994, Promittere Securities Ltd. was registered in Ontario as a limited market dealer. Between December 22, 1994 and November 20, 2001, WAS (operating as Promittere Securities Ltd. until October 1, 1999) was registered in Ontario as a securities dealer. Since November 20, 2001, WAS has been registered in Ontario as a mutual fund dealer and a limited market dealer. WAS became a Member of the MFDA on March 4, 2003.

14. Lawson has been registered as a mutual fund salesperson with WAS (and its predecessor, Promittere Securities Ltd.) since January 1, 1995. At all material times, Lawson was and remains registered as the President and Secretary of WAS, its sole salesperson and its Compliance Officer.

15. At all material times, WAS was essentially a one-person mutual fund dealer with Lawson as its only salesperson. Thiessen and Lawson worked out of the same office (which was shared by WAS and Promittere) and Promittere did not have any employees other than the two administrative support personnel that Promittere and WAS shared.

Sale of Promittere S & P 500

16. On October 8, 1992, Thiessen incorporated 1003686 Ontario Limited. In early 2002, Thiessen and Lewis created the Promittere product. G.H. Lewis was retained to manage the investment of funds raised by the sale of shares of Promittere through trading in S&P Futures Index Contracts and other similar instruments on the Chicago Mercantile Exchange. On June 25, 2002, Thiessen changed the company’s name from 1003686 Ontario Limited to Promittere S & P 500 Limited (defined above as “Promittere”).

17. Thiessen has, at all material times, been the sole director, President and Secretary of Promittere and its predecessor.

18. Thiessen presented and recommended the Promittere product to Lawson for sale to WAS-clients and, on August 1, 2002, Lawson began selling shares of Promittere to WAS-clients.

19. Lawson states that he invested $5,000 in Promittere as a means of testing the product. He did not monitor the trading conducted by Lewis in respect of these funds. Upon inquiry, Lawson was advised by Thiessen and Lewis that he made a profit but no back-up documentation was provided.

20. Lawson and his wife subsequently invested further funds in shares of Promittere such that their combined total investment was in the amount of $135,118 CDN, plus the approximately $50,000 CDN in fees that Lawson had received in the form of shares as at September of 2006. To make their cash contributions for these shares, Lawson and his wife wrote personal cheques in the cumulative amount of $58,163 CDN, Lawson’s numbered company, 614385 Canada Inc., wrote cheques in the cumulative amount of $63,955 CDN, and Lawson directed that fees or commissions payable to him by Promittere Capital Group for sales of other products in the cumulative amount of $13,000 CDN be paid directly to Promittere.

21. Upon the collapse of Promittere, the Lawsons lost their entire investment.

22. Between August 1, 2002 and November 1, 2005, 48 clients of WAS invested $2,883,993 USD in shares of Promittere on the advice of Lawson. In respect of those sales, Lawson directed clients to make cheques payable to Promittere in US funds. Thiessen forwarded these funds from Promittere’s US dollar bank account to a US dollar bank account over which Lewis had sole signing authority. Lewis then allegedly transferred the funds to a trading account held by Lewis or G.H. Lewis at ED & F Man International Inc., a broker for exchange-listed futures and options.

23. Upon receipt of funds from Promittere, Promittere was issued units of a trust established as part of the Promittere product that Lewis and Thiessen had created. Corresponding shares of Promittere were then issued to clients of WAS who had invested in the product.

24. Once WAS-client investment funds were relinquished to Lewis or G.H. Lewis, the alleged performance of the trust units was reported to Thiessen by Lewis daily by email. The email contained a single figure which Lewis described as the closing value for the trust units for the day.

25. Thiessen provided investors in Promittere with a monthly update on the value of their shares. Each investor also received an annual statement from Promittere. Lawson and/or Thiessen periodically provided some investors with a copy of a monthly newsletter which Lewis provided to Promittere to describe his alleged trading activities.

26. At the time of sale, Lawson asked clients to complete a Promittere share subscription agreement and a WAS New Account Application Form. Lawson also provided clients with a current version of a 2-page share offering summary for Promittere, which had been prepared by Thiessen and reviewed by Lewis (the “Promittere Summaries”). The Promittere Summaries contained the following representations, with returns reported up to the most recent year-end:

(a) Promittere was created to permit shareholders to participate in the managed trading of S&P 500 Futures Index Contracts;

(b) Lewis’ net return to investors to date has been: 77% in 1999 (six months), 163% in 2000, 169% in 2001, 230% in 2002, 102.6% in 2003, and 70.5% in 2004. The Promittere Summary noted that these returns were calculated net of management fees, trading costs and currency conversions;

(c) G.H. Lewis would receive an incentive-based fee equal to 50% of the amount by which the percentage increase in the value of the investment exceeded an annual return of 20% (the “Management Fee”). The percentage increase in the value of the investment was to be calculated net of commissions. To the extent that the 20% threshold was not reached, the amount of such shortfall would be carried forward and deducted from the increase in the value of the investment in future years;

(d) Promittere’s investment objectives and risk management strategies included the active use of limit price and stop loss orders, the closure of all contracts at the end of the day resulting in 100% cash position, and a 15-20% limit of asset exposure on any one trade hence the risk of large losses as a percentage of assets was negligible{1}; and

(e) Redemptions would only be processed once per year, on the last business day of December.

Regulatory Investigations, Proceedings and Fraud Charges

Compliance Review – Conflict of Interest

27. As set out in subparagraph 26(c) above, in return for managing the trading activities of Promittere, G.H. Lewis received the Management Fee. Lawson understands that G.H. Lewis then paid one of Thiessen’s Promittere companies, but not Promittere as defined herein, a fee equal to 20% of the Management Fee collected, on an annual basis, in either cash or trust units (the “Promittere Fee”). Thiessen then paid Lawson, through WAS, a percentage of the Promittere Fee as a fee for his role in selling shares of Promittere to WAS-clients. Lawson earned fees in the amount of approximately $50,000 CDN which he received in the form of shares in Promittere. Lawson states that these shares were cancelled after he discovered the fraud.

28. In September of 2005, MFDA Compliance Staff conducted a compliance examination (the “Compliance Examination”) of WAS during which Staff advised Lawson that Staff was concerned with, among other things, the accuracy of WAS’ disclosure to clients regarding its relationship with Promittere and Thiessen. At that time, clients had only been advised that Promittere was created by Thiessen to allow shareholders to participate in Lewis’ trading activities. Written disclosure of the compensation payable to WAS, Thiessen and Lawson as a result of the sale of shares of Promittere, as well as the fact that Thiessen was a director and controlling mind of both WAS and Promittere, had not been made to clients of WAS.

29. Following the Compliance Examination, Lawson provided clients with written disclosure that Thiessen was a director of both WAS and Promittere. At that time he provided Form 45-501F3 to clients who he states had purchased under the closely held issuer exemption (as set out in paragraphs 42-44 below) and WAS advised clients that any requests for the sale of shares of Promittere would be accommodated. The compensation payable to WAS, Thiessen and Lawson for the sale of shares of Promittere was not disclosed.

30. In September 2006, Thiessen and Lawson advised Staff that they had just learned that the investment returns provided by Lewis appeared to have been fabricated such that the value of the investment was greatly overstated. They further advised Staff that they had been advised that the actual amount remaining in the bank and trading accounts was approximately $40,000 USD. This represented a shortfall of approximately $5,760,000 USD based on Lewis’ reported value of Promittere in the amount of $5,800,000 USD at that time.

31. In 2008, a handful of WAS-clients appear to have received payments directly from Promittere on account of their shares in Promittere in the cumulative amount of approximately $63,000, in exchange for the provision of full and final releases.

32. Lawson believes that some Promittere shareholder funds have been recovered through court proceedings or may be recovered as a result of potential tax refunds not yet obtained. However, to date, WAS-clients have not been compensated for the losses they have incurred as a result of their investment in shares of Promittere (with the exception of the payments described in paragraph 31 above). Accordingly, these clients appear to have lost their entire investment in shares of Promittere with no reasonable prospect of recovery.

MFDA Investigation

33. On September 16, 2006, Lawson participated in an examination at his office conducted by Staff pursuant to s. 22 of MFDA By-law No. 1. On June 17, 2010, Lawson attended at the offices of the MFDA and participated in a second examination conducted by Staff, Lawson has had an opportunity to review the transcripts of both examinations in their entirety and confirms the truth of their contents. In September of 2006, at the request of MFDA Staff and as a result of the investigation of this matter, WAS agreed to accept terms and conditions on its membership which included a requirement to cease trading in all exempt securities and related issuers, as well as increased financial reporting requirements to the MFDA. While these terms and conditions expired on March 31, 2007, WAS agreed to continue to abide by them on a voluntary basis. The second and third round compliance examinations conducted by MFDA Compliance Staff confirm that WAS has continued to comply with the terms and conditions.

34. On September 15, 2006, the Manitoba Securities Commission (“MSC”) issued a temporary cease trade order against Promittere in relation to the distribution of its shares to the public allegedly in reliance on the accredited investor exemption to the applicable statutory prospectus and registration requirements. An order was also made removing the availability of any trading registration exemptions from Thiessen. On August 3, 2007, the MSC extended the cease trade order against Promittere until a hearing is held to examine the allegations against Promittere. The MSC’s order against Thiessen lapsed effective July 18, 2007.

Fraud Charges Against Lewis

35. On June 20, 2007, Lewis was arrested and charged with two counts of Fraud Over $5,000 and Theft Over $5,000 by the Metropolitan Toronto Police Force. On September 14, 2009, Lewis plead guilty to a fraud charge and has served a sentence of 12 months under house arrest.

Failure to Conduct Adequate Due Diligence

36. Lawson should have ensured that WAS subjected Promittere to a heightened level of due diligence to ensure that he fully understood the nature and risks of the investment before approving for sale and selling shares of Promittere to clients of WAS, for the following reasons, among others:

Promittere had never previously been sold by WAS or Lawson (or by anyone else) and Lawson had no prior experience with an investment like Promittere;

As a newly created investment, Promittere had no prior track record for Lawson to use to assess the performance of Promittere in varying market conditions;

Promittere employed a sophisticated strategy of trading in S&P Futures Contracts and other similar interests listed on the Chicago Mercantile Exchange Index and other similar interests listed with which Lawson had only a basic familiarity. The specifics of the strategy were not fully disclosed in the Promittere Summary or otherwise made available in writing to investors. There were also no controls on Lewis’ ability to vary or change altogether the strategy employed by Promittere;

Promittere was not required by regulators to disclose the specific securities it held, the extent of its leveraging, or the extent of its short selling. Promittere had no obligation to make periodic or annual regulatory filings in respect of its performance and operations;

It was difficult to identify comparable investments, classes of investments or published benchmarks for investments of Promittere’s nature against which Lawson would be able to evaluate its actual performance going forward; and

Lawson was aware that an actual or potential conflict of interest existed because Thiessen was the controlling mind of both WAS and Promittere and as a result of the financial compensation received by WAS, Thiessen and Lawson for the sale of shares in Promittere.

37. Lawson states that, on the basis of his 16 year professional relationship with Thiessen, he trusted and relied almost entirely on Thiessen to conduct the necessary due diligence in respect of G.H. Lewis, Lewis and Promittere.

38. Lawson did not ensure that WAS conducted appropriate due diligence on G.H. Lewis, Lewis and Promittere, before approving for sale and selling shares of Promittere to clients of WAS. Specifically, Lawson did not ensure that WAS took steps to, among other things:

(a) Conduct a review of G.H. Lewis’ corporate status – G.H. Lewis’ corporate status was cancelled in 1992.

(b) Confirm the registration status of Lewis and G.H. Lewis – Neither Lewis nor G.H. Lewis was registered to advise or trade in securities in Canada or the US.

(c) Conduct an assessment of G.H. Lewis’ and Lewis’ management qualifications and track record - Lawson did not have a copy of or review Lewis’ curriculum vitae. Lawson did not speak to or contact anyone who could provide a reference for Lewis, his qualifications or his abilities except Thiessen.

(d) Review the financial position and trading history of G.H. Lewis - Lawson did not take any steps to verify the historic returns reported by Lewis. He also did not take any steps to confirm his assumption that Thiessen had put in place reasonable internal controls to: confirm that client funds were being handled properly; monitor Lewis’ trading activities; and verify Lewis’ reported returns.

39. Lawson states that prior to approving for sale and selling Promittere to WAS-clients, he inquired of Thiessen and Lewis and was informed of, the following: (a) the general nature of the trading to be conducted in the Promittere fund; (b) Lewis’ representation that the assets of Promittere would typically only be invested to the extent of 15-20% in any one trade; and (c) Lewis’ representation that G.H. Lewis would only receive a management fee if the value of the investment exceeded an annual return of 20%. Lawson also states that he was incorrectly advised by Thiessen that Lewis was registered to conduct securities trading in Canada and the US.

Suitability of the Investments

40. Lawson did not adequately assess and assign a risk level to Promittere. Lawson presented Promittere to clients as a medium to high-risk product. It was a high risk product based on, among other things, the lack of verified historic trading results for Promittere and the limited liquidity of the product. Further, the only internal controls to monitor G.H. Lewis’ trading activities and the handling of client funds were those Lawson believed were being exercised by Theissen. Lawson provided clients with the Promittere Summaries, which described the risk of large losses as a percentage of assets as negligible. Lawson did not disclose the full risks of investing in the Promittere product to clients of WAS.

41. For 34 clients of WAS to whom Lawson sold shares of Promittere, a risk tolerance of moderate or lower had been identified in their existing Know Your Client (“KYC”) information. Promittere was therefore an unsuitable investment for those clients. Lawson did not record sufficient KYC information for 8 other WAS-clients who invested in shares of Promittere in order to determine that the investment was suitable for these clients.

42. Lawson states that he believed that investments in shares of Promittere could be made by clients of WAS in reliance on the closely held issuer or the accredited investor exemptions then provided for pursuant to Ontario securities laws.

43. Lawson believed that he understood the requirements for qualification for and use of the closely held issuer exemption{2}. However, he relied on Thiessen to determine whether the exemption remained available to clients of WAS. Lawson did not provide clients with a copy of Form 45-501F3 at least 4 days before their purchase of shares in Promittere, as was then required pursuant to Ontario securities law in order to rely on the closely held insurer exemption{3}. Accordingly, he was unable to rely on this exemption in respect of these sales.

44. Form 45-501F3 describes investments in small businesses as “inherently risky” and makes the following statement with respect to them, “NEVER MAKE A SMALL BUSINESS INVESTMENT THAT YOU CANNOT AFFORD TO LOSE IN ITS ENTIRETY.” As set out in paragraph 40 above, at the time of sale, Lawson presented the Promittere product to clients of WAS as a medium to high risk product and provided clients with the Promittere Summaries which described the risk of large losses as a percentage of assets as “negligible.”

45. Lawson states that he believed that 23 clients of WAS to whom he sold shares of Promittere (in addition to himself and his wife) qualified as accredited investors. However, complete documentation evidencing their qualification is only available for 14 of these clients. The documentation for the remaining 9 clients was insufficient to enable Lawson to qualify them as accredited investors.

VI. CONTRAVENTIONS

46. Lawson, in his capacity as President and Secretary, Compliance Officer and mutual fund salesperson for WAS, admits that between August 1, 2002 and November 1, 2005:

(a) He approved, recommended and allowed the sale of shares of Promittere, a related company of WAS, to clients without conducting or ensuring that adequate due diligence had been conducted on the product and without making adequate inquiries to ensure that the product was suitable for sale to clients of WAS and after having provided clients with incomplete and inaccurate information as to the risk level associated with the product, contrary to MFDA Rules 2.2.1(a) and (b) and MFDA Rule 2.1.1(c).

(b) He sold shares of Promittere to 48 clients of WAS without ensuring that these investments were suitable for all of these clients and in keeping with the clients’ investment objectives, contrary to MFDA Rule 2.2.1(a), (b) and (c), and MFDA Rule 2.1.1(c).

(c) He sold shares of Promittere to 9 clients of WAS in reliance on the accredited investor exemption without obtaining sufficient documentation to enable him to qualify them as accredited investors in accordance with s. 2.3 of Ontario Securities Commission Rule 45-501 and subsequently, s.2.3 of National Instrument 45-106, prior to selling them shares of Promittere, contrary to MFDA Rule 2.1.1(c).

(d) He sold shares of Promittere to clients of WAS in reliance on the closely held issuer exemption when he had not complied with the requirements of such exemption as set out in s. 2.1 of Ontario Securities Commission Rule 45-501, in that he failed to provide any of the clients with a copy of Form 45-501F3 at least 4 days prior to their purchase of shares of Promittere. This contravention engages the jurisdiction of the Hearing Panel to impose a penalty on Lawson pursuant to s. 24.1.1(h) of MFDA By-Law No. 1 and contrary to MFDA Rule 2.1.1(c).

(e) He facilitated the sale of shares of Promittere to 48 clients of WAS without providing clients with written disclosure of the relationship between WAS and Promittere at the time of sale or of WAS’ financial interest in the sale of shares of Promittere, thereby giving rise to an actual or potential conflict of interest which Lawson did not ensure was addressed by the exercise of responsible business judgment influenced only by the best interests of the clients, contrary to MFDA Rule 2.1.4.

VII. TERMS OF SETTLEMENT

47. Lawson agrees to the following terms of settlement:

(a) a fine in the amount of $20,000;

(b) a permanent prohibition against Lawson from holding the position of Officer, Director, Compliance Officer, Ultimate Designated Person or Branch Manager of an MFDA Member, except with respect to his continuing status as President and Chief Compliance Officer of WAS for the purpose of ensuring the orderly resignation of WAS;

(c) a permanent prohibition against Lawson from selling any securities pursuant to any exemptions under applicable securities legislation;

(d) that Lawson shall successfully complete the Canadian Securities Course or such other course acceptable to the MFDA within 12 months of the approval of this Settlement Agreement;

(e) costs of $5,000 payable to the MFDA;

(f) that Lawson will in the future comply with all MFDA By-laws, Rules and Policies, and all applicable securities legislation and regulations; and

(g) that Lawson will appear and give truthful testimony at a hearing commenced by the MFDA against any person or entity in relation to any of the facts or allegations referred to in this Settlement Agreement, if requested by Staff.

VIII. STAFF COMMITMENT

48. If this Settlement Agreement is accepted by the Hearing Panel, Staff will not initiate any proceeding under the By-laws of the MFDA against Lawson in respect of any conduct or alleged conduct of Lawson in relation to the facts set out in Parts IV and V of this Settlement Agreement, subject to the provisions of paragraph 53 below.

IX. PROCEDURE FOR APPROVAL OF SETTLEMENT

49. Acceptance of this Settlement Agreement shall be sought at a hearing of the Central Regional Council of the MFDA on a date agreed to by counsel for Staff and Lawson.

50. Staff and Lawson may refer to any part, or all, of the Settlement Agreement at the settlement hearing. Staff and Lawson also agree that if this Settlement Agreement is accepted by the Hearing Panel, it will constitute the entirety of the evidence to be submitted respecting Lawson in this matter, and Lawson agrees to waive his rights to a full hearing, a review hearing before the Board of Directors of the MFDA or any securities commission with jurisdiction in the matter under its enabling legislation, or a judicial review or appeal of the matter before any court of competent jurisdiction.

51. Staff and Lawson agree that if this Settlement Agreement is accepted by the Hearing Panel, then Lawson shall be deemed to have been penalized by the Hearing Panel pursuant to s. 24.1.2 of By-law No. 1 for the purpose of giving notice to the public thereof in accordance with s. 24.5 of By-law No. 1.

52. Staff and Lawson agree that if this Settlement Agreement is accepted by the Hearing Panel, neither Staff nor Lawson will make any public statement inconsistent with this Settlement Agreement. Nothing in this section is intended to restrict Lawson from making full answer and defence to any civil or other proceedings against him.

53. If this Settlement Agreement is accepted by the Hearing Panel and, at any subsequent time, Lawson fails to honour any of the Terms of Settlement set out herein, Staff reserves the right to bring proceedings under the By-laws of the MFDA against Lawson based on, but not limited to, the facts set out in Parts IV and V of the Settlement Agreement, as well as the breach of the Settlement Agreement.

54. If, for any reason whatsoever, this Settlement Agreement is not accepted by the Hearing Panel or an Order in the form attached as Schedule “A” is not made by the Hearing Panel, each of Staff and Lawson will be entitled to any available proceedings, remedies and challenges, including proceeding to a disciplinary hearing pursuant to ss. 20 and 24 of By-law No. 1, unaffected by this Settlement Agreement or the settlement negotiations.

55. Whether or not this Settlement Agreement is accepted by the Hearing Panel, Lawson agrees that he will not, in any proceeding, refer to or rely upon this Settlement Agreement or the negotiation or process of approval of this Settlement Agreement as the basis for any allegation against the MFDA of lack of jurisdiction, bias, appearance of bias, unfairness, or any other remedy or challenge that may otherwise be available.

X. DISCLOSURE OF AGREEMENT

56. The terms of this Settlement Agreement will be treated as confidential by the parties hereto until accepted by the Hearing Panel, and forever if, for any reason whatsoever, this Settlement Agreement is not accepted by the Hearing Panel, except with the written consent of both Lawson and Staff or as may be required by law.

57. Any obligations of confidentiality shall terminate upon acceptance of this Settlement Agreement by the Hearing Panel.

XI. EXECUTION OF SETTLEMENT AGREEMENT

58. This Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement.

59. A facsimile copy of any signature shall be effective as an original signature.

Dated: April 5, 2012

 

“David Liptrott”
Witness – Signature

David Liptrott
Witness – Print Name

 

“Douglas Lawson”
Douglas A. Lawson

 

“Hugh Corbett”
Witness – Signature

Hugh Corbett
Witness – Print Name



“Shaun Devlin”
Staff of the MFDA
Per: Shaun Devlin
Vice-President, Enforcement

 

 

{1}  Note that the Promittere Summary for 2002 identified 25-30% of asset exposure on any one trade as opposed to 15-20%.

{2}  In summary, at the material time, the exemption permitted closely-held issuers to raise a lifetime maximum of $3,000,000 CDN in any number of financings from up to 35 investors.  As set out in footnote 3 below, this exemption was replaced with the private issuer exemption in September 2005 which was further amended in 2009.

{3}  In September of 2005, pursuant to National Instrument 45-106, the closely held issuer exemption (which had been provided for in s. 2.1 of Ontario Securities Commission Rule 45-501), was replaced with the private issuer exemption.  Given the nature of the changes made to the exemption, the requirement to provide investors with a copy of Form 45-501F3 ceased.  Lawson sold shares of Promittere to one client of WAS after this amendment.