Securities Law & Instruments

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c. S.5 AS AMENDED

AND

IN THE MATTER OF

ADAM F. NIKOLAUS

 

DIRECTOR'S DECISION

Background

1. From February 15, 1994 to November 28,2001, Adam F. Nikolaus (Applicant) was registered as a salespersonwith Quadras Investment Services Inc. (formerly London FinancialCentre Limited, prior thereto London Fund Management Limitedand prior thereto Prudential Fund Management Canada Limited)(Quadras), a mutual fund dealer.

2. Mr. Nikolaus resigned for cause from Quadrason November 28, 2001 following a meeting concerning questionablesignatures on an insurance policy application.

3. By letter dated January 31, 2002, staffadvised the Applicant that it proposed to attach terms andconditions to his registration as a salesperson with CredentialAsset Management Inc. (Credential) due to his previous employmentactivities as a salesperson with Quadras. In the letter, theApplicant was advised that he had an opportunity to be heardbefore the Director and that if he intended to exercise thatright, staff required notice within 14 days.

4. Also by letter January 31, 2002, Credentialwas advised that staff proposed to attach terms and conditionsto the Applicant's registration as a salesperson althoughthe reasons for staff's position were not set out in thisletter.

5. By letter dated February 6, 2002, the Applicantadvised that he would like the opportunity to be heard andthat he had not yet been "advised of the particularsregarding the activities that resulted in this action".

6. Following a series of emails and othercorrespondence among staff, the Applicant and Quadras, onJune 7, 2002, staff sent a letter to Quadras asking for "detailedinformation regarding any client complaints/issues and theoutcome of subsequent investigations conducted". Staffis entitled to request this information for the purposes ofadministering the Securities Act (Ontario) as set outin section 3.11 of the Act.

7. London Life Insurance Company respondedon July 4, 2002 (a copy of the letter was provided to Quadras).Attached to that letter is a summary of over 20 complaintsreceived concerning the Applicant. As well, the letter summarizesthe details of a compliant received by Quadras (summarizedbelow). According to the letter, Mr. Nikolaus resigned afterbeing confronted with these allegations.

8. Ms. "B", a client, questioneda loan on her life insurance policy that was used to pay premiumson another life insurance policy. When Ms. "B" wasshown the documentation requesting and authorizing the loan,she stated that it was not her signature.

9. The majority of the other complaints relatedto the use of existing values in older life insurance policiesto pay premiums on newer life insurance policies. The letterstates that the majority of the complaints were received afterthe Applicant was no longer associated with Quadras/LondonLife. The letter also states that none of the complaints involvedthe use of mutual fund accounts.

Staff's submissions

10. By letter dated October 3, 2002, staffadvised the Applicant that it was recommending to the Directorthat his application for registration as a salesperson withCredential be denied. The letter set out staff's reasons forthe recommendation as follows:

"Staff's concerns as to your past conductwhile in the employ of Quadras Investment Services/LondonLife Insurance Company.

A total of 24 client complaints were receivedsubsequent to your resignation; including, but limited to,allegations of churning, misrepresentation and fraud.

During the period between July 1997 and June2000, after you had resigned, Quadras Investment ServicesLtd./London Life Insurance Company received a number of complaintsfrom dissatisfied clients serviced by you. In a number ofinstances, clients alleged they bought new insurance policieswith the understanding that no out-of-pocket premiums wouldbe required, or existing contracts would fund all policies;this was not true. Clients alleged that they were sold newpolicies on the pretense that coverage would be increasedwith no additional costs which were not covered. In one instance,clients alleged policy changes were made without their knowledgeand consent; that the forms were changed after they had signedthem. In another instance, a client questioned a loan on herlife insurance policy that was used to pay premiums on anotherlife insurance policy that she claims she did not authorize.When shown the documentation requesting and authorizing theloan, she stated it was not her signature.

After investigating these allegations, LondonLife found it necessary to take remedial action, includingreversing a loan and rescinding the policies you had issued.

It is staff's opinion that these facts establishthat you lack the competence, integrity and trustworthinessrequired of a securities industry professional, and are thereforeunsuitable for registration."

11. In the letter, the Applicant was advisedthat he had an opportunity to be heard and that if he intendedto exercise that right, staff required notice within 14 days

12. Also by letter dated October 3, 2002,Credential was advised that staff had recommended to the Directorthat the Applicant's registration as a salesperson be denied.

Applicant's submissions

13. The Applicant responded by letter datedOctober 9, 2002. Some of the text of the letter is reproducedhere.

"I am disappointed that previous clientsfeel that they have purchased products from me without a fullunderstanding of what and how they bought. From March 1993to September 1996 as a sales agent, I sold some 500 policieswith no complaints and thought I was doing a good job. Infact London Life thought I was doing a good job, as they promotedme to management.....

I sold Prudential Policies and after the mergermost of the Pru Agents left London Life. Policyholders werefrustrated that their concerns were not being addressed becauseLondon Life Agents didn't understand their policies. LondonLife Agents were frustrated because they had to spend timewith these policyholders and were not compensated unless theysold a new policy. For some agents it became an opportunityto rescind policies and issue new ones.

Prudential had a strict guideline regardingthe use of an existing policy to fund another new policy....Each new policy had to be personally delivered by the agentto the client. The insured was required to sign a receiptconfirming the details of the policy were accurate and asrequested. Receipts were returned to Prudential Head Office.Any policies with outstanding receipts were returned to theRegional Manager for follow up and completion.

Prudential Head Office sent the Regional Managera list of all new policies and how they were funded, to ensuretransactions were reasonable. Sales, including mine, werestrictly monitored.

I have never intentionally misled or misrepresentedfacts to my clients."

Decision

14. On the basis of having reviewed and consideredall written submissions provided to me, it is my decisionto deny the registration of the Applicant as a mutual fundsalesperson.

15. In making a recent decision (Re JaimeArlindo Vilas-Boas, (2002) 25 OSCB 6401), I set out someof staff's analysis relevant to these types of cases. Partof that analysis is set out again here.

16. Section 26 of the Securities Actprovides that:

(1) Granting of Registration - Unlessit appears to the Director that the applicant is not suitablefor registration... or that proposed registration... is objectionable,the Director shall grant registration... to an applicant.

(2) Terms and Conditions - The Directormay in his or her discretion restrict a registration by imposingterms and conditions [which]....may restrict the durationof a registration and may restrict the registration to tradesin certain securities or a certain class of securities.

17. The onus of proof rests with staff ofthe Commission, who must establish that the registrant is"not suitable for registration" or that the registrationis otherwise "objectionable".

18. In the Vilas-Boas staff materials,I was referred to a number of Commission decisions includingthe Mithras and Charko decisions. These decisionsread in part as follows:

... the role of the Commission is to protectthe public interest by removing from the capital markets --wholly or partially, permanently or temporarily, as the circumstancesmay warrant - those whose conduct in the past leads us toconclude that their conduct in the future may well be detrimentalto the integrity of those capital markets. We are not hereto punish past conduct; that is the role of the courts, particularlyunder section 118 of the Act. We are here to restrain, asbest we can, future conduct that is likely to be prejudicialto the public interest in having capital markets that areboth fair and efficient. In doing so we must, of necessity,look to past conduct as a guide to what we believe a person'sfuture conduct might reasonably be expected to be; we arenot prescient, after all.

Re Mithras Management Ltd., (1990)13 OSCB 1600

... the Director must necessarily place astrong reliance on an applicant's past behaviour.

Re Charko, (1992) 15 OSCB 3986

19. In my opinion, it would be inappropriateto register the Applicant as a mutual fund salesperson withCredential while serious questions regarding his past conductat Quadras remain outstanding. Further, I think it is clearthat the past conduct of the Applicant would lead to the conclusionthat his conduct in the future may well be detrimental tothe integrity of the capital markets (the Mithras test).In the words of the Mithras decision, "we must,of necessity, look to past conduct as a guide to what we believea person's future conduct might reasonably be expected tobe...". As well, I was guided by the Charko decisionand determined that I must place a strong reliance on theApplicant's past behaviour. Lastly, in my opinion, these principlesapply equally well to this case even though the Applicant'spast conduct related to the sale of insurance products andnot the types of products normally dealt with by a mutualfund salesperson.

November 11, 2002.

"Marrianne Bridge"