IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED
- and -
IN THE MATTER OF DAVID SINGH, JEFFREY LIPTON,
INFINITY INVESTMENTCOUNSEL LTD. AND FORTUNE FINANCIAL CORPORATION
OF THE ENFORCEMENT BRANCH OF THE
ONTARIO SECURITIES COMMISSION
The RespondentsThe respondent Infinity Investment Counsel Ltd. ("Infinity Investment Counsel") is acorporation organized pursuant to the laws of Canada. At all material times, InfinityInvestment Counsel was the portfolio manager of Infinity Canadian Fund and InfinityIncome and Growth Fund (the "Infinity Funds") and was registered with the OntarioSecurities Commission (the "Commission"), pursuant to the Securities Act (the "Act"), asinvestment counsel and portfolio manager.The respondent Fortune Financial Corporation ("Fortune") is a corporation organizedpursuant to the laws of Canada. At all material times, Fortune was registered with theCommission pursuant to the Act as a securities dealer.The respondent David Singh ("Singh") is an individual who resides in the Province ofOntario. Singh was at all material times:the controlling shareholder of Infinity Investment Counsel and Fortune;a director of Infinity Investment Counsel;a director of Fortune; andregistered with the Commission pursuant to the Act to sell securities and as thesupervisory procedures officer of Fortune.The respondent Jeffrey Lipton ("Lipton") is an individual who resides in the Province ofOntario. Lipton was at all material times:a director, the president and chief executive officer of Infinity InvestmentCounsel; andregistered with the Commission pursuant to the Act as a portfolio manager andinvestment counsel of Infinity Investment Counsel.
Improper TransactionsOn or about April 16, 1998, Singh and Lipton caused or permitted Infinity InvestmentCounsel to cause the Infinity Funds to purchase securities of Infinity Income Trust. Thesepurchases (the "Fund Purchases") were in violation of Ontario securities law and contraryto the public interest. In particular, the purchases were made for purposes other than thebest interests of the unitholders of the Infinity Funds. The purchases were critical to thesuccess of a financing to be used by Infinity Investment Counsel to repay debt obligationsincurred for the payment of sales commissions owed by it in connection with sales of theInfinity funds.Lipton and Infinity Investment Counsel were, at all material times, responsible for themanagement of the Infinity Funds. By causing the Infinity Funds to purchase securities ofInfinity Income Trust, Lipton and Infinity Investment Counsel breached their duties to acthonestly, in good faith and in the best interests of the Infinity Funds.Fortune acted as an underwriter and selling group member with respect to the InfinityIncome Trust distribution. In doing so, Fortune violated Ontario securities law and actedcontrary to the public interest, as more particularly described below.
The Fund PurchasesInfinity Income Trust was established by a Trust Indenture dated February 5, 1998 (the"Trust Indenture"). Infinity Income Trust Management Inc. ("Infinity Income TrustManagement"), the settlor of the trust, established the trust to finance a debt obligationincurred for the payment of sales commissions paid on the sale of units of the Infinityfunds sold on a deferred sales charge basis which had accrued since August 1, 1997.The Trust Indenture appointed General Trust of Canada as the trustee of Infinity IncomeTrust with absolute and exclusive power, control and authority over and management ofthe property and affairs of Infinity Income Trust.By a Management Agreement dated February 5, 1998, Infinity Income Trust, by itstrustee, General Trust of Canada, appointed Infinity Income Trust Management as itsmanager with full authority and responsibility to manage and administer Infinity IncomeTrust.At all material times, Singh was a director of Infinity Income Trust Management andLipton was a director and the president, chief executive officer and secretary of InfinityIncome Trust Management.A prospectus to qualify units of Infinity Income Trust was receipted by the Commissionon February 5, 1998. Pursuant to the terms of the offering:trust units were to be sold for $20.00 per unit;the maximum aggregate amount of the offering was $30 million;the minimum aggregate amount of the offering was $15 million; andthe offering was to close on February 27, 1998.By an amended prospectus filed on March 19, 1998, the closing date of the offering wasextended to April 17, 1998 and the offering price per unit was decreased to $10.00.On April 15, 1998, only two days before the scheduled closing, subscriptions for less than$9 million of units of Infinity Income Trust had been received for the Infinity IncomeTrust distribution which had a minimum closing threshold of $15 million.On April 15, 1998, two days prior to the closing of the offering, Infinity InvestmentCounsel sought to purchase for the Infinity Funds 250,000 units of Infinity Income Trustfor a purchase price of $2.5 million. Following discussions among the selling group,Infinity Investment Counsel and their representatives, the purchase was reduced such thatthe Infinity Funds together purchased 150,000 units of Infinity Income Trust for a totalpurchase price of $1.5 million.In addition to the $1.5 million worth of units of Infinity Income Trust purchased by theInfinity Funds, other investors purchased additional units between April 9, 1998 and theclosing date of April 17, 1998. The Infinity Income Trust offering closed on April 17,1998, with a total subscription of 1,517,057 units, for total gross proceeds of$15,170,570.If the Fund Purchases had not been made, the Infinity Income Trust distribution could nothave closed on April 17, 1998. In that event, Infinity Investment Counsel would havebeen obligated to find alternative financing to satisfy the outstanding debt obligationincurred to pay those sales commissions which had accrued since August 1, 1997.The amount and timing of the purchase of Infinity Income Trust units by the InfinityFunds suggest that the purchase was made to allow the distribution by Infinity IncomeTrust to close and not for the best interests of the Infinity Funds.In addition, the Fund Purchases were in breach of conflict of interest provisions andmutual fund investment restrictions contained in Ontario securities law.
The Role of FortuneOn February 5, 1998, an agreement (the "Agency Agreement") was entered into amongDeacon Capital Corporation ("Deacon"), Porthmeor Securities Inc. ("Porthmeor"),Infinity Income Trust, Infinity Income Trust Management and Infinity InvestmentCounsel.The purpose of the Agency Agreement was to provide for the formation and managementof a selling group to offer units of Infinity Income Trust for sale. Pursuant to the AgencyAgreement:Deacon and Porthmeor were to act as agents for Infinity Income Trust;in return for their role as agents, Deacon and Porthmeor were to receive an agencyfee of 7% of gross proceeds of the offering;the 7% agency fee was to be divided as follows:5/7 was a selling commission to be paid to each selling group memberresponsible for a sale of units of Infinity Income Trust;1/7 was to be divided between Deacon (as to 90%) and Porthmeor (as to10%); andthe remaining 1/7 was to be divided among Deacon, Porthmeor andFortune in proportion to their respective sales of units of Infinity IncomeTrust.On February 13, 1998, an agreement (the "Fortune Selling Group Agreement") wasentered into among Deacon, Porthmeor and Fortune. The Fortune Selling GroupAgreement provided that Fortune would receive the 5% selling commission referred to inparagraph 21(c)(i) above, plus the additional fee referred to in paragraph 21(c)(iii) above.Fortune sold 83.4% of the Infinity Income Trust units and was paid the prescribed fees forall sales. As a result, Fortune was entitled to a total fee of approximately $750,000, madeup as follows:approximately $625,000, being the normal selling commission of 5% of theproceeds of sales made by Fortune, as contemplated by the provision set out inparagraph 21(c)(i) above; plusapproximately $125,000, being Fortune's share of an additional 1% of theproceeds of sales made by Fortune, as contemplated by the provision set out inparagraph 21(c)(iii) above.Fortune acted as an underwriter in connection with the distribution of units of InfinityIncome Trust, a related party, and sold more than 50% of the offering in contravention ofthe related party underwriting restrictions of Ontario securities law.
The Role of Infinity Investment CounselThe Infinity funds are dealer managed mutual funds as defined by Ontario securities law.Infinity Investment Counsel, as portfolio manager, purchased for the Infinity Funds,through Fortune, units of Infinity Income Trust in violation of Ontario securities law.
Singh's RoleSingh, as a director and the controlling shareholder of Infinity Investment Counsel,caused or permitted Infinity Investment Counsel to purchase for the Infinity Funds unitsof Infinity Income Trust in violation of Ontario securities law.
Lipton's RoleAt all material times, Lipton made the investment decisions for the Infinity Funds. Liptoncaused or permitted Infinity Investment Counsel to purchase for the Infinity Funds unitsof Infinity Income Trust in violation of Ontario securities law.
Conflict of Interest PoliciesAs of June 10, 1997, the following condition attached to the registration of InfinityInvestment Counsel:
Infinity Investment Counsel Ltd. ("Infinity") shall adopt and maintain reasonablepolicies and procedures to minimize the potential for conflict of interestresulting from its relationships and those of its officers, directors andshareholders with Fortune Financial Corporation ("Fortune Financial"), FortuneInvestment Corp. ("Fortune Investment"), and the directors, officers andshareholders of Fortune Financial and Fortune Investment.In January 1998, Infinity Investment Counsel applied to the Commission to have therestrictions attaching to its registration deleted. In making this application, InfinityInvestment Counsel represented that it would comply with Rule 31-501 which requiresthe adoption of policies and procedures to minimize the potential for conflict resultingfrom relationships between registrants.At all material times, Infinity Investment Counsel had on file with the Commission aConflict of Interest Policy which indicated as follows with respect to underwritings byFortune:
A potential conflict exists for benefit to Fortune Group where Fortune Group isacting in a securities underwriting or agency capacity and such securities arepurchased by the Infinity Group.
Policy: The provisions of section 4.2(a) of National Policy 39, imposingrestrictions against the investment by dealer managed funds in issues underwrittenby a related entity, deal with this conflict and will be adhered to.At all material times, Fortune had on file with the Commission a Conflict of InterestPolicy in which Fortune acknowledges that it is a "related party" to Infinity InvestmentCounsel and as a result is subject to various investment and trading restrictions prescribedby Ontario securities law.The Simplified Prospectus and the Annual Information Form for the Infinity Funds bothdated March 30, 1998 disclose that the investment restrictions in National Policy 39 applyto the Infinity funds.The Fund Purchases violated the Conflict of Interest Policies filed with the Commissionby Infinity Investment Counsel and Fortune and the representations made by InfinityInvestment Counsel in its application to the Commission and in the Simplified Prospectusand Annual Information Form of the Infinity funds.
Conduct Contrary to the Public InterestThe conduct of Infinity Investment Counsel, Singh and Lipton in connection with theFund Purchases was contrary to the public interest as such conduct violated the followingprovisions of Ontario securities law or was otherwise contrary to the public interest:
a. Paragraph 118(2)(a) of the Act which prohibits a mutual fund from investing inissuers in which persons responsible for the management of the mutual fund areofficers or directors, unless the "clients" (unitholders) of the mutual fund haveprovided their consent to the investment;
b. paragraph 118(2)(b) of the Act which prohibits a mutual fund from purchasing thesecurities of an issuer from the account of those responsible for the managementof the mutual fund and their related entities;
c. paragraph 4.02(a) of National Policy 39 which prohibits a mutual fund fromacquiring securities which the dealer manager of the mutual fund or its relatedentities have underwritten until 60 days following the conclusion of thedistribution;
d. paragraph 4.02(b) of National Policy 39 which prohibits a dealer managed mutualfund from investing in securities of an issuer, an officer or director of which isalso a director or officer of a company which is a dealer manager of the mutualfund or an associate or affiliate of the dealer manager;
e. subsection 2.05(11) of National Policy 39 which prohibits, without approval ofthe securities authorities, contracts between a mutual fund and certain relatedparties as principals in making purchases or sales of portfolio securities; and
f. subsection 116(1) of the Act which imposes upon every person or companyresponsible for the management of a mutual fund a duty to act honestly, in goodfaith and in the best interests of the mutual fund in respect of the exercise of itspowers and the discharge of its duties.The conduct of Fortune in connection with its role as underwriter of the distribution byInfinity Income Trust was contrary to the public interest as it violated section 224 of theRegulation under the Act which prohibits registrants from acting as underwriters inconnection with the distribution of securities of a related or connected issuer unless theregistrant underwrites a portion of the deal that is less than the portion underwritten by aregistrant unrelated to the issuer.The conduct of Infinity Investment Counsel, Fortune, Lipton and Singh in connectionwith the Fund Purchases was contrary to the public interest as it violated Conflict ofInterest Policies filed with and representations made to the Commission by InfinityInvestment Counsel and Fortune at the direction of Lipton and Singh.Such other allegations as Staff may make and the Commission may permit.
DATED at Toronto, this 12th day of January, 1999.