Would you consider it fraud?

The following case summary is posted on the MFDA website as part of their program of transparent regulation. However it was not alleged that the perpetrators of this scheme committed fraud and therefore the case was not reported to police.

From the information available it seems to us that if this is not considered fraud by the regulators then there is something seriously wrong with the regulatory system. If it also not considered fraud by the police then there is something seriously wrong with our justice system.

We invite your comment by e-mail to sipa@sipa.ca

CASE SUMMARY #200711
July 17, 2007
MFDA Case Summary
Enforcement
This case summary was prepared by Staff of the MFDA.

Hearing Panel approves Settlement Agreement with Altimum
Mutuals Inc.

Nature of Proceeding

A Hearing Panel of the Central Regional Council of the Mutual Fund Dealers Association of Canada (“MFDA”) has approved a Settlement Agreement between the MFDA and Altimum Mutuals Inc. (“Altimum”).

By-Laws, Rules, Policies Violated

The Hearing Panel considered the Settlement Agreement at a hearing held on June 15, 2007 in Toronto. Under the Settlement Agreement, Altimum admitted that it acted contrary to the public interest by contravening MFDA Rules 2.7.2 and 2.1.1(c) by distributing
misleading sales communications to clients.

Advertising and Sales Communications

MFDA Rule 2.7.2 states that:
No Member shall issue to the public, participate in or knowingly allow its name to be used in respect of any advertisement or sales communication in connection with its business which:
(a) contains any untrue statement or omission of a material fact or is otherwise false or misleading, including the use of a visual image such as a photograph, sketch, drawing, logo or graph which conveys a misleading impression;
(b) contains an unjustified promise of specific results;
(c) uses unrepresentative statistics to suggest unwarranted or exaggerated conclusions, or fails to identify the material assumptions made in arriving at these conclusions;
(d) contains any opinion or forecast of future events which is not clearly labeled as such;
(e) fails to fairly present the potential risks to the client;
(f) is detrimental to the interest of the public, the Corporation or its Members; or
(g) does not comply with any applicable legislation or the guidelines, policies or directives of any regulatory authority having jurisdiction over the Member.

Standard of Conduct

MFDA Rule 2.1.1 states that:
Each Member and each Approved Person of a Member shall:
(a) deal fairly, honestly and in good faith with its clients;
(b) observe high standard of ethics and conduct in the transaction of business;
(c) not engage in any business conduct or practice which is unbecoming or detrimental to the public interest; and
(d) be of such character and business repute and have such experience and training as is consistent with the standards described in this Rule 2.1.1, or as may be prescribed by the
Corporation.

Altimum paid a fine of $10,000, imposed pursuant to MFDA By-Law No. 1, Section 24.1.1(b).

Summary of Facts

Altimum is registered as a mutual fund dealer and a limited market dealer in Ontario. Altimum has been a Member of the MFDA since May 29, 2003.
On or about July 18, 2003, Altimum entered into a referral arrangement with Portus Alternative Asset Management Inc (“Portus”). The Agreement provided that Portus would pay Altimum’s referral fees based on the amount of assets invested by their clients in Portus securities.
Between December 2003 and January 2005, the Respondent received approximately $117,000 in referral fees from Portus under the terms of the agreement.
In February 2005, the Ontario Securities Commission issued orders requiring Portus and its affiliates to cease trading in securities because of apparent breaches of the Securities Act, R.S.O. 1990, c. S.5 as amended. Bankruptcy and enforcement proceedings were commenced against Portus.
Securities dealers that referred clients to Portus in Ontario, including Altimum voluntarily agreed to terms and conditions on their registration stipulating that the Ontario Dealers would repay clients all referral fees received from Portus. In January 2003, Altimum repaid
approximately $117,000 in referral fees to its clients.
In March 2004, Altimum produced two pamphlets for the purpose of soliciting investments by clients in Portus securities and similar exempt securities. The features attributed to the investments described in the pamphlets were based primarily upon Altimum’s understanding of Portus securities.
One of the pamphlets purported to promote an investment product referred to as the Retirement Security Investment Plan (“R.S.I.P.”).
Altimum had obtained a registered trademark for the term R.S.I.P. prior to publishing the pamphlet. The other pamphlet described and promoted the merits of what appeared to be a unique investment tool, software or methodology called the Portfolio navigator. Neither the
R.S.I.P nor the Portfolio Navigator investment process existed. Both concepts were the creation of Altimum designed to induce clients to invest in Portus securities. The pamphlets did not acknowledge that Portus was the issuer of the underlying investments being promoted.
The RSIP pamphlet constituted a misleading sales communication issued to the public because it contained untrue or misleading statements, contrary to MFDA Rule 2.7.2(a), as it stated or implied that an RSIP:
(a) “is the perfect Retirement Security Investment Plan”;
(b) “was created for those 55 years of age and older who want to stop taking so much risk with their retirement funds”;
(c) “was designed to replace G.I.C.’s in a portfolio”;
(d) features benefits such as positive and consistent returns and broad diversification; and
(e) operates such that an investor’s “$10,000 portfolio will be constructed in the same way as a $20,000,000 portfolio of a pension fund in Toronto if both are invested on the same day.
Both portfolios will hold exactly the same investments in exactly the same proportions and both investors will pay exactly the same fees.”
(f) is recognized by the Canadian government as an alternative to a Registered Retirement Savings Plan (“R.R.S.P.”) by:
i. expressly contrasting an R.S.I.P. to an R.R.S.P. in a manner that suggested both were retirement investment savings vehicles sanctioned by the government;
ii. making use of a similar acronym, accompanied in places by a red maple leaf;
iii. stating that the RSIP was designed for individuals investing for their retirement years and seeking a tax advantaged return; and
iv. including a maple leaf on the cover of the pamphlet in a manner which suggested that the R.S.I.P. was an investment product sanctioned by the government.
(g) is a unique investment product and the Respondent is one of a select group of investment dealers authorized to offer it to investors, and stated that “[a]n R.S.I.P. is not available from your local bank … credit union … trust company …[or] insurance agent” and “[m]any investment dealers are not yet authorized to offer an R.S.I.P.” because they have “to meet certain minimum standards” and “stringent requirements in terms of education, experience and amount of money under management” when in fact the pamphlet was a marketing tool to promote sales of Portus securities which were widely available for purchase from any one of the other sources referred to in the pamphlet and the Respondent had not satisfied any unique or stringent standards to become eligible
to offer Portus securities to its clients.
(h) The pamphlet contained unjustified promises of specific results, contrary to Rule 2.7.2(b), including “a nice, steady return of about 9% per year without a lot of volatility” and “steady growth higher than the rate of interest on G.I.C.’s”.
The RSIP Pamphlet failed to present the potential risks of investing in Portus securities, contrary to Rule 2.7.2 (e).
The Portfolio Navigator Pamphlet constituted a misleading sales communication that was issued to the public contrary to MFDA Rule 2.7.2 because:
(a) The pamphlet contained untrue or misleading statements, contrary to Rule 2.7.2(a), as it stated or implied that:
i. “[Our elite managers] can make money whether the market is going up or down….Your portfolio is managed to generate a smooth, reliable rate of return that is significantly higher than fixed income investments” when there was no reasonable basis for making such claims;
ii. “Portfolio Navigator” is a special tool, software or methodology that is used exclusively by the Respondent when, in fact, the term “Portfolio Navigator” was conceived of by the Respondent and incorporated into the Respondent’s marketing pamphlet to promote interest among the Respondent’s clients in securities issued by Portus which were widely available from other market participants;
iii. “We use something called Portfolio Navigator to tell us when to buy and sell. It is a process in which tools are applied to your portfolio on a daily basis, to make sure that you are investing only when the risk is low and that you are selling when the risk in the market is high” when no such tool was being applied to the Respondent’s client portfolios and there was no basis for describing the administration of Portus securities in that manner;
(b) The Respondent is registered as an IC/PM and actively manages the underlying investments as the Respondent is the only corporate entity referred to in the pamphlet and the pamphlet states among other things that:
i. “With Portfolio Navigator as a guide, we invest for you”; ii. includes frequent references to “Our elite managers” who make use of “technical analysis”, “short selling, leverage,
market timing and hedging” and “active, discretionary money management techniques, aiming to improve the performance of your portfolio while systematically reducing risk”; and
iii. “We don’t bother you with the day-to-day decisions. Our elite managers take whatever initiative is necessary and make all of the trading decisions for you;”
(c) The pamphlet makes no reference to any potential risks to a client who wishes to participate in the Portfolio Navigator investment strategy, contrary to Rule 2.7.2 (e).
The Respondent sent the RSIP Pamphlet and the Portfolio Navigator Pamphlet to approximately 150 clients and displayed the pamphlets in one of its offices and on its website, where clients or potential clients could obtain copies.
Of the total amount of $3.3 million invested in Portus securities by clients of the Respondent, more than $2,750,000 was invested by approximately 70 of the 150 clients to whom the Respondent mailed copies of the pamphlets.
The pamphlets remained on display and available on the Respondent’s website until MFDA Staff raised concerns about the pamphlets during a sales compliance review of the Respondent in February 2005. After being advised of MFDA Staff concerns, the Respondent voluntarily discontinued further distribution of the pamphlets.

DM#115406v2

Snakes in Suits - from the Wealthy Boomer website

Snakes in suits -- from whom do small investors need protection?
Today's column in the paper is about an investing "victim who found a way to get even." I find the very name of SIPA -- the Small Investor Protection Association -- interesting. It begs the question "From whom do small investors need protection?"

The markets, perhaps? Or worse, from themselves?

It's true that do-it-yourself investors can often be their own worst enemies, buying high and selling low and chasing fads at the worst possible time. China, for example, seems to be the current mania that will end badly, based on pronouncements this week from Alan Greenspan and other dignitaries.

In theory, a good investment advisor should be the ultimate protector of the small investor. And often that is the case. Unfortunately, as books like The Naked Investor or Snakes in Suits make clear, there is a minority of unscruplous brokers and advisors out there who prey on investors. Stan Buell -- the founder of SIPA -- believes that between 5 and 12% of advisors are not acting in the best interests of clients.

In those cases, sadly, investors may need protection from the very financial institutions that should be acting as fiduciaries. And in Buell's experience, some of the worst offenders have risen to the very top of the big financial institutions that dominate the investing landscape.

There's a book that was published last year called Snakes in Suits. It describes a species of "corporate psychopath" that preys on small investors or even subordinates in the workplace.

Fortunately, Canada has several consumer advocates -- like Buell -- who are willing to stand up to these well-dressed snakes. See the SIPA web site at www.sipa.ca for more resources, including a discussion forum.

Canada is the Wild West of Investment Scams

Well said, Stan!

Canada is the Wild West of investment scams. Boiler rooms, stock promotions, you name it.

A similar situation at Southwest Gold (SWG) recently. Salted ore samples.......Still no action when this stuff occurs. Of course, stock drops like a rock. We call it the Canadian injustice system here on the west coast. The perps get the judges sympathy. Nod, nod, wink, wink.

Doubt Conrad would have been prosecuted in Canada. The U.S. makes an example of crooks. In Canada, well...you know the story.

Sooner or later the little guy will just give up on investing or shift their money and attention to better regulated markets. The investment community (big money) hasn't yet got it. You would think they would be worried, but times are still good for them.

Guess we can only warn people to be very careful.

e-mail received from Dr. G.

Canadian Regulatory Failure

If you didn't believe it before, believe it now. It really is Investor Beware!.

It took ten years for the OSC to investigate and arrive at a court decision. Felderhof, former Bre-X chief geologist and Vice Chairman, found not guilty on all charges.

The scam of the century. Salted core samples. Outright fraud. Yet no one has been jailed.

It seems ridiculous that the chief geologist would not be aware that the gold wasn't there. How could he support the outlandish claims of resources? Was it alluvial gold (from a riverbed) that was used to salt these core samples? A layman might not know the difference, but a seasoned geologist? It boggles the mind.

Wouldn't the chief geologist be responsible for establishing the drillin and sampling program? Wouldn't he also be responsible for ensuring the security of the samples so the testing results would be reliable?

As an officer (vice chairman) of the company wouldn't he want to be sure of this incredible gold find? Did he fulfill his responsibilities as chief geologist and company officer?

In any case he was an officer of the company that perpetrated the fraud labelled the scam of the century.

Whether he instigated it or not, he participated as chief geologist and a company officer. It makes no sense that he is allowed to escape with the loot ... some $90 million. How many small investors have lost their savings on Bre-X? How many widows and seniors have lost all of their savings? How many are still suffering?

The current regulatory system is failing to protect investors.

How can Government allow this to continue?

It's time to revamp the regulatory system and the justice system.

If anything positive came out of this regulatory fiasco it is this:
1. The public now knows with certainty that the Canadian Regulatory System is failing investors and does not provide investor protection either preventative or remedial.
2. The public now knows with certainty that the Canadian Justice System does not provide justice.

Unfortunately it also sends a message to the rest of the world that Canada really is the Wild West of investing without frontier justice.

At the same time it sends a message to prospective fraudsters that Canada is the place to be if their intent is to defraud the public.

Will this precipitate Government action? It should.

What can you do?

Write your Member of Provincial Parliament and your Member of Federal Parliament in Ottawa.

Do it for your children and their children.

Stan Buell