A Springhill mutual funds salesman is facing a disciplinary hearing after allegations materialized of misrepresenting clients, investment risks and recommending a leveraged investment strategy without performing due diligence.
Joseph Daniel Laurie, a registered mutual fund dealer with Keybase Financial Group, has been called before the Mutual Fund Dealer Association [MFDA] of Canada on May 21, by teleconference, concerning the hearing over allegations he misrepresented the information of 16 clients, misrepresented investment risk by failing to outline potential investment losses and for recommending a leveraged investment strategy – knows as the “Smith Manoeuver” – without determining if the strategy was suitable for the investors.
The incidents are alleged to have occurred between 2005 and 2001.
Hugh Corbett, Managing Director of Enforcement for the MFDA says two outcomes generally follow a disciplinary hearing. The first, the hearing panel will decide on the allegations and information presented before making a ruling and imposing any disciplinary action if founded. The second, a settlement can be decided provided a set of facts and penalties are agreed upon.
Neither conclusion has been reached, Corbett said, and the hearing will proceed in May.
It is not believed charges will stem from the hearing regardless of the outcome.
“Typically matter that go to law enforcement from us involve fraud or theft… in this matter none of those are concerns,” Corbett said.
Laurie, who has been licensed to sell insurance since 1994 and registered to sell mutual funds since 2001, carries out his business in Springhill with Keybase Financial Group, a member of the MFDA. The MDFA alleges Laurie did not adequately explain the risks using borrowed money or the risk of the investment strategy he recommended.
The MFDA claims Laurie provided spreadsheets to some or all of the clients that showed only positive financial outcomes.
“The Respondent [Laurie] failed to include performance projections based on more conservative rates of return or declining market conditions, including a negative return [ie. investment losses],” the notice reads.
It’s alleged Laurie did not disclose potentially negative outcomes and, if he did, he downplayed the likelihood. The clients believed the investment strategy would generate monthly income, was low risk and would have no out-of-pocket expenses.
In the 20-page notice of hearing, the MDFA alleges none of the clients had good knowledge of investing, were living on fixed income or retired seniors, and some were in poor health or unable to re-enter the work force.
“Many, if not all, of the clients did not have the means to cover the costs of servicing the investment loans in the event the leveraged investment strategy did not perform as the Respondent represented it would.”
The MDFA alleges Laurie overstated the income on the accounts of four clients – in one instance almost tripling the actual income– and overstated assets while understating liabilities. The net worth of one client was overstated by $485,000, the MFDA alleges. In another case $1,000 in monthly alimony obligations were omitted. According to the MFSA’s notice, homes were overestimated, recorded as mortgage-free when they weren’t, and money borrowed from lenders was recorded as assets.
“The Respondent presented a more favourable depiction of the clients’ personal and financial circumstances to Keybase and to the investment loan providers in a manner which increased likelihood that Keybase would not query or reject the leveraged investment strategy recommended by the Respondent to the clients and the lender would approve the clients’ investment loan application.”
Borrowing between $50,000 and $1 million, clients ended up with loans beyond their ability to repay if the investment strategy turned, the securities regulator claims.
“The Respondent [Laurie] knew, or ought to have known the investment loans were excessive,” the notice stated.
Without identifying risk and creating an opportunity for clients to borrow more than they should, the MDF alleges the investment strategy was not appropriate for clients because they were unable to afford the associated costs without relying on anticipated income gains, and their ability to withstand investment losses jeopardized their financial security when the investment strategy did not perform as represented.
“Almost all of the clients incurred significant investment losses… these investment losses have jeopardized the financial security of the clients and caused significant hardship for them.”
Hearing date set
The Atlantic Regional Council of the Mutual Funds Dealers Association of Canada will conduct its first disciplinary hearing via teleconference on May 21. If deemed necessary, the hearing panel has the power to impose reprimands, fines up to $5 million for each offence or prohibited the accused form conducting securities related business in the future.
The Amherst News contacted Laurie, who issued a short statement.
“I will be responding to these allegations when I go before the hearing panel of the MFDA,” Laurie said.