IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
MICHAEL GOSELIN, IRVINE DYCK,
DONALD McCRORY and ROGER CHIASSON
IN THE MATTER OF
IRVINE JAMES DYCK
SETTLEMENT AGREEMENT BETWEENSTAFF OF THE
ONTARIO SECURITIES COMMISSIONAND IRVINE DYCK
1. By Notice of Hearing dated November 9,2001 (the "Notice of Hearing"), the Ontario SecuritiesCommission (the "Commission") announced that itproposed to hold a hearing to consider, among other things,whether pursuant to subsection 127(1) and 127.1 of the SecuritiesAct, R.S.O. 1990, c. S.5 (the "Act"), it isin the public interest for the Commission to make an Order:
(a) that trading in any securities by therespondent Irvine Dyck ("Dyck") cease permanentlyor for such time as the Commission may direct;
(b) prohibiting Dyck from becoming or actingas a director or officer of any issuer permanently or forsuch period as specified by the Commission;
(c) reprimanding Dyck;
(d) requiring Dyck to pay the costs of theCommission's investigation and the hearing; and
(e) such other terms and conditions as theCommission may deem appropriate.
2. By Notice of Hearing dated October 13,1999 (the "Dual Capital Notice of Hearing") theCommission announced that it proposed to hold a hearing toconsider whether pursuant to subsection 127(1) of the Act,it is in the public interest for the Commission to make anOrder:
(a) that trading in any securities by Dyckcease permanently or for such time as the Commission maydirect;
(b) that any exemptions contained in Ontariosecurities law do not apply to Dyck permanently, or forsuch period as specified by the Commission;
(c) reprimanding Dyck; and
(d) such other order as the Commission maydeem appropriate.
II. JOINT SETTLEMENT RECOMMENDATION
3. Staff of the Commission ("Staff")agrees to recommend settlement of the proceeding respectingDyck initiated by the Notice of Hearing and Dual Capital Noticeof Hearing (collectively, the "Proceedings") inaccordance with the terms and conditions set out below. Dyckconsents to the making of an order against him in the formattached as Schedule "A" based on the facts setout in Part III of this Settlement Agreement.
III. STATEMENT OF FACTS
4. Solely for the purposes of the Proceedings,and of any other proceeding commenced by a securities regulatoryagency, Staff and Dyck agree with the facts set out in paragraphs5 through 31 of this Settlement Agreement.
A. Dyck's Registration
5. Dyck became registered with the Commissionto sell mutual funds in September 1987. By October 1988, healso was registered to sell limited market products. Duringthe material times, Triple A Financial Services Inc. ("TripleA") sponsored Dyck's registration. Dyck has not beenregistered since October 1999.
6. During the time that Triple A sponsoredDyck, Roderick Alton ("Alton") was Triple A's Presidentand a director. Dyck operated a Branch Office in North Bayunder the sponsorship of Triple A.
B. The North George Capital Limited Partnershipsand Lionaird Capital Corp.
(i) The North George Capital Limited Partnerships
7. In the mid-nineteen nineties, Alton andMichael Magee ("Magee") formed several limited partnerships.North George Capital Limited Partnership was formed on September8, 1995 pursuant to the laws of Ontario. North George CapitalII Limited Partnership, North George Capital III Limited Partnership,North George Capital IV Limited Partnership and North GeorgeCapital V Limited Partnership (collectively with North GeorgeCapital Limited Partnership, the "North George LimitedPartnerships" or the "Partnerships") were formedon August 16, 1996.
8. The general partner of the North GeorgeLimited Partnerships was North George Capital Management Limited("North George Management"). North George Managementwas a private corporation owned equally by Alton and Magee.
(ii) The Distribution of Units of the NorthGeorge Limited Partnerships
9. The North George Limited Partnerships raisedfunds by offering investors/subscribers the opportunity topurchase units in one or more of the Partnerships. Each subscriberbecame a limited partner of the Partnership(s) in which heor she invested. Through the sale of units, the North GeorgeLimited Partnerships raised approximately US$4.4 million.Such sales did not go through Triple A or any other registereddealer.
10. The distribution of the North George LimitedPartnerships securities contravened section 53 of the Act.None of the North George Limited Partnerships filed a preliminaryprospectus or prospectus with the Commission.
11. The North George Limited Partnershipsprepared Offering Memoranda, according to which the Partnershipsrelied on the "seed capital" prospectus exemptioncontained in paragraph 72(1)(p) of the Act. Neither this,nor any other, prospectus exemption under the Act was availableto the Partnerships.
12. Effectively, the Partnerships were oneissuer. Among other things, such Partnerships raised fundsbased on virtually identical Offering Memoranda and co-mingledinvestors' funds to be used for a common purpose. The NorthGeorge Limited Partnerships represented five tranches of thesame investment program. Several Partnerships were formedas an attempt to circumvent the "seed capital" exemptionrequirement that sales be made to no more than 25 purchasers.
13. Only the Offering Memorandum of NorthGeorge Capital IV Limited Partnership was filed with the Commission.Only North George Capital IV Limited Partnership filed reports(Form 20's) as required under the Act.
14. The North George Limited Partnershipsinitially promised a rate of return of 5% per month to investors(with the salesperson earning the same monthly percentageas the investor). Subsequently, the Partnerships offered investorsa 24% annual return (from a total generated rate of returnin excess of 48%). The North George Limited Partnerships generatedlittle income. Any "interest" paid to subscriberscame largely out of other subscribers' capital. A small numberof investors redeemed their investment. Most investors losta significant portion of their investment.
(iii) The Distribution of Lionaird CapitalCorp. Promissory Notes
15. In May 1997, Lionaird Capital Corp. ("Lionaird")was incorporated pursuant to the laws of Ontario. Lionairdwas a private corporation the shares of which were held byAlton, Magee and others in trust for an unnamed party. Altonwas the President, Chief Operating Officer and a directorof Lionaird. Magee was Lionaird's Vice-President and a director.Kenneth Gill ("Gill") also was an officer and adirector.
16. Lionaird raised monies through the saleof promissory notes to investors. Lionaird promissory noteswere marketed as RRSP-eligible. Through the purchase of promissorynotes by investors, Lionaird raised in excess of $3.4 million.Such sales did not go through Triple A or any other registereddealer.
17. The distribution of Lionaird promissorynotes contravened section 53 of the Act. Lionaird did notfile a preliminary prospectus or a prospectus with the Commission.On September 12, 1997, Lionaird filed with the Commissionan Offering Memorandum dated July 25, 1997. The Lionaird OfferingMemorandum related to a purported private placement of 12%secured redeemable promissory notes. Such notes were describedin the Offering Memorandum as having a five year term andpaying interest to investors of 12% per year (with a potentialbonus payment of up to 12%).
18. According to its Offering Memorandum,Lionaird relied on the "private placement" and "seedcapital" prospectus exemptions contained in paragraphs72(1)(d) and (p) of the Act. Neither these, nor any other,prospectus exemptions under the Act were available to Lionaird.
19. Most of the investors in Lionaird lostall, or substantially all, of their investment.
C. The Sale of Dual Capital Limited PartnershipUnits
20. Between October, 1994 and December 1995,Dyck sold securities, namely limited partnership units (the"Dual Capital Units") of Dual Capital Limited Partnership,where such trading was a distribution of such securities,without having filed a preliminary prospectus and a prospectusand obtaining receipts therefor from the Director as requiredby subsection 53(1) of the Act.
21. The Dual Capital Units were purportedlyoffered for sale pursuant to the "seed capital"prospectus exemption set out in paragraph 72(1)(p) of theAct. The requirements of the "seed capital" exemptionfrom the prospectus requirements in Ontario securities lawwere not satisfied.
22. During the material times, Dyck sold securities,namely the Dual Capital Units, on his own behalf and/or onbehalf of a company operating under the name "Dual FinancialGroup", and not as a salesperson registered with TripleA. Therefore, Dyck did not trade in accordance with his registrationunder subsection 26(1) of the Act.
23. Dyck sold Dual Capital Units to ten investors.The ten investors paid $370,000 in total for the purchaseof the Dual Capital Units through Dyck. Dyck earned commissionsof approximately $30,000 for the sale of the Dual CapitalUnits.
24. Further, Dyck failed to assess the suitabilityof the investments to the needs of the investors.
25. Dyck and his wife invested US$30,000 inthe Dual Capital Units.
D. Dyck's Conduct
(i) The North George Limited Partnershipsand Lionaird
26. Between June 1996 and late February 1998,Dyck sold approximately US$1.1 million worth of units in theNorth George Limited Partnerships to 36 Ontario investorsand approximately $2.7 million worth of Lionaird promissorynotes (approximately $1.8 million as a RRSP investment) to114 Ontario investors.
27. A significant percentage of Dyck's clientswho invested in the Partnerships and/or Lionaird were retiredor approaching retirement. Many investors had been clientsof Dyck for several years and trusted him implicitly.
28. Dyck participated in distributions whichdid not comply with the Act and engaged in other conduct contraryto Ontario securities law and the public interest by:
(a) failing to deal fairly and in the bestinterests of his clients.
When Dyck started to sell the North GeorgeLimited Partnerhsips units to his clients, he had been registeredfor 7 years. Dyck failed to conduct the appropriate duediligence concerning the nature and quality of the Partnershipsand Lionaird investments and the requirements of Ontariosecurities law relating to their distributions.
Dyck made inquiries exclusively of Alton,a principal of the Partnerships and Lionaird and in an obviousconflict position. Dyck took his representations at facevalue notwithstanding discrepancies in the Offering Memoranda,a lack of credible supporting documentation, a logical inconsistencybetween a "no risk" investment and high ratesof return and the ultimate difficulties experienced by theNorth George Limited Partnerships.
The Offering Memoranda prepared by the Partnershipsand Lionaird contained inconsistent statements and did notprovide a clear or logical explanation as to how the investmentworked and why it was able to generate significant ratesof return. In many instances, Dyck did not provide to investorsa copy of the correct, or any, Offering Memorandum priorto their purchase.
Dyck did not review the financial statementsof the Partnerships prior to selling the Partnerships andLionaird products to many of his clients. When he receivedthe Partnerships' statements, he continued to sell notwithstandingthat they indicated that the "interest" beingpaid to investors was taken largely from other investors'capital;
(b) representing to his clients that:
(i) the North George Limited Partnershipsand Lionaird investments were safe and that an investor'sprincipal was 100% guaranteed notwithstanding, among otherthings, that the Offering Memoranda stated that the securitieswere speculative and the Lionaird Offering Memorandumstated that each note was secured against the assets ofthe company. Dyck continued to assure clients that theirprincipal invested in Lionaird was 100% guaranteed evenin the face of a company memorandum which explicitly statedthat the notes were not guaranteed;
(ii) his verbal representations overrodeinconsistent statements in the Offering Memoranda sincethe Memoranda only existed to satisfy the Commission;
(iii) all the client's funds could beretrieved notwithstanding, among other things, that theLionaird notes matured in five years and were only redeemableby the company;
(iv) the minimum investment was largerthan enumerated in the Offering Memoranda;
(v) the investments were registered withthe Commission; and
(vi) the government had approved Lionairdas RRSP-eligible.
(c) recommending and encouraging investorsto borrow funds, obtain a line of credit secured by theirhome, or use their existing line of credit, to invest inthe Partnerships and/or Lionaird;
(d) aggressively marketing the North GeorgeLimited Partnerships and Lionaird investments to his clients.Dyck pressured many clients to buy by telling them thatthe investment opportunity would expire or be capped imminently;
(e) selling Lionaird notes to investorsnotwithstanding that the North George Limited Partnershipswere facing difficulties and were failing to pay the promisedreturn, particularly given that the principals and generalinvestment strategy were the same for both investments.
Dyck sold the Lionaird securities even inthe face of a request from Anne Gilmour (administrator ofLionaird) to stop selling the notes because of serious concernsover the propriety of Alton's conduct respecting investors'funds;
(f) signing Subscription Forms/Agreementsfor certain clients of the respondent Roger Chiasson ("Chiasson")without conducting the appropriate KYC;
(g) recommending and selling investmentsunsuitable for his clients. Dyck advised many of his clientsto transfer and redeem conservative investments to purchasethe Partnerships and Lionaird securities. Certain clientsredeemed a diversified portfolio of mutual funds to investin one product. Several retired clients, or clients approachingretirement, invested all or most of their retirement savings/RRSPmonies in Partnerships and/or Lionaird on the advice ofDyck.
Many of Dyck's clients were financiallyand/or emotionally devastated by the loss of their savings.Several of his clients' health suffered because of the resultingstress and anxiety.
29. The Partnerships' Offering Memoranda statedthat the units would be sold directly to investors by theGeneral Partner and that no commissions were payable. Further,investors were unaware that Dyck was entitled to continuingtrailer fees equivalent to their interest payments.
30. As a result of selling units in the NorthGeorge Limited Partnerships and promissory notes of Lionairdto clients, Dyck earned commissions and trailer fees of approximately$322,200. He paid out approximately $50,600 to individuals(including Chiasson) for their involvement in certain sales.
(ii) Dual Capital
31. In relation to the sale of Dual CapitalUnits, Dyck acted contrary to the public interest by:
(a) selling securities on his own behalfand/or on behalf of a company operating under the name "DualFinancial Group" contrary to his registration as asalesperson with Triple A under subsection 26(1) of theAct;
(b) selling securities, namely the DualCapital Units, which constituted a distribution withouta prospectus contrary to subsection 53(1) of the Act; and
(c) failing to assess the suitability ofthe Dual Capital Units to the needs of his clients.
IV. Dyck's Position
32. Dyck represents to Staff that:
(a) He had worked with Alton for many yearsand trusted him;
(b) He was never a principal in the NorthGeorge Limited Partnerships or Lionaird investments. Herelied on the representations of Triple A (his dealer) andAlton that the Partnerships and Lionaird investments compliedwith the Act's and the Commission's requirements;
(c) he relied upon the representations ofTriple A and Alton that they had conducted the appropriatedue diligence on the North George Limited Partnerships andLionaird investments;
(d) he relied upon and repeated the representationsof Alton concerning the required minimum investment;
(e) he continued to sell the Lionaird investmentsafter Anne Gilmour asked him to stop because Alton assuredhim that everything was fine;
(f) In 1996, his wife invested US$120,000in the North George Limited Partnerships. Dyck and his wifepurchased $227,000 worth of the Lionaird securities in February1998. To so invest in Lionaird, they redeemed all theirRRSP mutual funds. In order to invest in the Partnerships,Dyck's wife borrowed against the equity in their home. Theyhave not received back any of their principal;
(g) In 1997, his brother-in-law investedUS$100,000 in the Partnerships. He has not received backany of his principal; and
(h) In connection with his sale of the DualCapital Units, he understood that such offering had beencleared by Triple A.
V. TERMS OF SETTLEMENT
33. Dyck agrees to the following terms ofsettlement:
(a) the making of an order:
(i) approving this settlement;
(ii) that trading in any securities byDyck cease for twenty years with the exception that, afterthree years from the date of the approval of this settlement,Dyck is permitted to trade securities through a registereddealer for the account of his registered retirement savingsplan (as defined in the Income Tax Act (Canada));
(iii) that Dyck is prohibited from becomingor acting as an officer or director of a reporting issuerfor twenty years; and
(iv) reprimanding Dyck.
VI. STAFF COMMITMENT
34. If this settlement is approved by theCommission, Staff will not initiate any other proceeding underthe Act against Dyck in relation to the facts set out in PartIII of this Settlement Agreement.
VII. APPROVAL OF SETTLEMENT
35. Approval of the settlement set out inthis Settlement Agreement shall be sought at the public hearingof the Commission scheduled for November 18, 2002 or suchother date as may be agreed to by Staff and Dyck (the "SettlementHearing"). Dyck will attend in person at the SettlementHearing.
36. Counsel for Staff or Dyck may refer toany part, or all, of this Settlement Agreement at the SettlementHearing. Staff and Dyck agree that this Settlement Agreementwill constitute the entirety of the evidence to be submittedat the Settlement Hearing.
37. If this settlement is approved by theCommission, Dyck agrees to waive his rights to a full hearing,judicial review or appeal of the matter under the Act.
38. Staff and Dyck agree that if this settlementis approved by the Commission, they will not make any publicstatement inconsistent with this Settlement Agreement.
39. If, for any reason whatsoever, this settlementis not approved by the Commission, or an order in the formattached as Schedule "A" is not made by the Commission:
(a) this Settlement Agreement and its terms,including all discussions and negotiations between Staffand Dyck leading up to its presentation at the SettlementHearing, shall be without prejudice to Staff and Dyck;
(b) Staff and Dyck shall be entitled toall available proceedings, remedies and challenges, includingproceeding to a hearing of the allegations in the Noticeof Hearing and Statement of Allegations of Staff, unaffectedby this Agreement or the settlement discussions/negotiations;
(c) the terms of this Settlement Agreementwill not be referred to in any subsequent proceeding, ordisclosed to any person, except with the written consentof Staff and Dyck or as may be required by law; and
(d) Dyck agrees that he will not, in anyproceeding, refer to or rely upon this Settlement Agreement,the settlement discussions/negotiations or the process ofapproval of this Settlement Agreement as the basis for anyattack on the Commission's jurisdiction, alleged bias orappearance of bias, alleged unfairness or any other remediesor challenges that may otherwise be available.
VIII. DISCLOSURE OF SETTLEMENT AGREEMENT
40. Except as permitted under paragraph 36above, this Settlement Agreement and its terms will be treatedas confidential by Staff and Dyck until approved by the Commission,and forever, if for any reason whatsoever this settlementis not approved by the Commission, except with the consentof Staff and Dyck, or as may be required by law.
41. Any obligations of confidentiality shallterminate upon approval of this settlement by the Commission.
IX. EXECUTION OF SETTLEMENT AGREEMENT
42. This Settlement Agreement may be signedin one or more counterparts which together shall constitutea binding agreement.
43. A facsimile copy of any signature shallbe as effective as an original signature.
November 17, 2002.
November 18, 2002.