Desron Financial Services Inc. - Opportunity to be Heard
In the Matter of Staff’s Recommendation
for the Refusal of Registration
of Desron Financial Services Inc.
Opportunity to be Heard by the Director
Section 31 of the Securities Act
1. For the reasons outlined below, my decision is to refuse the registration of Desron Financial Services Inc. (Desron).
2. On June 3, 2011, Staff recommended that Desron’s application for registration as an exempt market dealer (EMD) be refused. Under section 31 of the Securities Act (Ontario) (Act), Desron is entitled to an opportunity to be heard (OTBH) before a decision is made by me, as Director.
3. My decision is based on the:
- arguments of Michael Denyszyn, Senior Legal Counsel, Compliance and Registrant Regulation Branch of the Ontario Securities Commission (OSC) for Staff,
- arguments and testimony of David Roberts (currently the sole shareholder of Desron) on behalf of Desron, and
- testimony of Kelly Everest and Albert Ciorma (Staff of the OSC).
Suitability for registration generally
4. Subsection 25(1) of the Act requires any person that engages in the business of trading to be registered in the relevant category. As set out in numerous prior decisions of the Director, a registrant is in a position to perform valuable services to the public, both in the form of direct services to individual investors and as part of the larger system that provides the public benefits of fair and efficient capital markets. A registrant also has a corresponding capacity to do material harm to individual investors and to the public at large. Determining whether an applicant should be registered is thus an important component of the work undertaken by the OSC.
5. Subsection 27(1) of the Act provides that the Director shall register a person applying for registration unless it appears to the Director that the person is not suitable for registration or that the registration is otherwise objectionable. In the recent case of Ittihad Securities Inc., Re (2010) 33 OSCB 10458, I, as Director, stated that:
“The OSC has, over time, articulated three fundamental criteria for determining suitability for registration – integrity (which includes honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities law), proficiency, and solvency. These three fundamental criteria have been codified in subsection 27(2) of the Act, which provides that in determining whether a person is suitable for registration, the Director shall consider whether the person has satisfied the requirements prescribed in the regulations relating to proficiency, solvency and integrity, and such other factors as the Director considers relevant. The determination of whether an applicant’s registration may be otherwise objectionable goes beyond the three suitability criteria above. Prior OSC decisions have held that registration is “otherwise objectionable” if it is determined, with reference to the purposes of the Act, that it is not in the public interest for the person or company to be registered. For example, see Mithras Management Ltd., Re (1990), 13 OSCB 1600.”
The issues at hand are Desron’s proficiency, integrity and solvency.
Submissions relating to the recommendation to refuse registration of DesronSummary of the submissions
6. Staff argues that the proposed registration of Desron should be refused on the grounds that Desron is unsuitable for registration due to;
- Roberts’ affiliation with, and activities on behalf of, HEIR Home Equity Investment Rewards Inc. (HEIR) and its related entities, and
- The inconsistencies, errors and deficiencies in Desron’s registration application.
Staff further argues that the proposed registration of Desron would be objectionable because of the objectionable purpose of Desron’s registration.
Roberts’ affiliation with, and activities on behalf of, HEIROSC statement of allegations against HEIR
7. HEIR, FFI First Fruits Investments Inc. (FFI), related entities, and principals Archibald Robertson and Eric Deschamps (collectively, the Respondents) are the subject of a Statement of Allegations dated March 29, 2011 (Statement of Allegations) issued by the OSC. In the Statement of Allegations, the OSC alleges that the Respondents engaged in acts in furtherance of trades (HEIR trading) including:
- Advertising and promoting HEIR and various securities
- Holding one-on-one sessions with investors that promoted HEIR and various securities
- Holding HEIR seminars and meetings with potential investors and arranging for third party entities to attend and give presentations promoting their securities and providing promotional and other materials, including offering memoranda, to potential investors, and
- Employing and contracting commissioned sales agents to bring in new investors and solicit investment in securities.
The OSC also alleges that the Respondents engaged in advising by offering their opinions on the investment merits of various specific securities by expressly or impliedly recommending and endorsing them to potential investors (HEIR advising).Desron’s and Roberts’ affiliations with HEIR
8. Staff alleges that Desron’s and Roberts’ well documented affiliation with HEIR and its related entities makes Desron unsuitable for registration. For example, in Desron’s registration application, Mr. Roberts discloses under current employment that:
- 7605072 Canada Inc., a holding company, owns 100% of Desron and its affiliate HEIR Inc. Mr. Roberts owns 22.5% of the holding company, Eric Deschamps owns 22.5% of the holding company, and Archibald Robertson (more commonly known as Archie Robertson) owns 55% of the holding company. Both Robertson and Deschamps are Respondents in the Statement of Allegations, and
- he is employed by HEIR Inc. (with Robertson, the CEO, as his immediate supervisor). The application form states that “HEIR, Inc. is an affiliate of [Desron]. Desron will work with HEIR, Inc. to gather clients. HEIR, Inc. is a wealth building education company…” (emphasis added).
I was advised by Roberts during the OTBH that Messrs. Robertson and Deschamps divested their indirect holdings in Desron on July 20 (five days before the OTBH) for a total of $775. I was also advised by Staff that Deschamps, who had originally applied for registration alongside Roberts with Desron, withdrew his individual submission on June 3.
9. Other affiliations between HEIR (and its related companies) and Desron or Roberts include:
- Desron’s website address is www.HEIR.ca and his email address is [email protected], b.
- An HEIR consultant list obtained by Staff shows Roberts as VP of Business Development of HEIR, c.
- Roberts advised me that he is an independent contractor for HEIR, d.
- Desron loaned funds to FFI, one of the Respondents in the Statement of Allegations e.
- Roberts received (through his personal holding company) cheques from HEIR totaling over $269,000 over approximately 26 months, and f.
- Roberts spoke at a number of HEIR events and membership meetings and Roberts was used as a “marketing tool” by Robertson.
10. I was advised by Staff that the United States Securities and Exchange Commission issued a complaint against Capital Mountain Holding Corp. (CMHC) and others in November 2009 alleging that CMHC entities raised over $25 million in an offering fraud. The complaint states in part:
“Defendants’ representations to investors were false. Instead of investing offering proceeds … Defendants used most of the funds to: make Ponzi payments; purchase luxury items…; pay Nelson’s personal expenses; and pay overhead for various companies… In summer 2009, Defendants’ scheme collapsed, payments to investors ceased and lien holders began foreclosure proceedings on the properties acquired and held by the Defendants”.
11. Roberts advised that he heard about CMHC in 2008 from Robertson. He advised that he paid his own way to Texas to perform due diligence on this investment at about that time. He also performed due diligence in March 2009 at CMHC’s offices in Texas with Robertson. He described his role at the second meeting as that of a “concerned investor”. His due diligence on the second visit included due diligence on four properties of the approximately 250 properties held by CMHC. Based on this visit, HEIR issued an undated letter (believed to be issued in March 2009) from Robertson indicating that:
“I am presently in Dallas, Texas with Dave Roberts, a Chartered Accountant, and Derek Nelson. We have spent the morning together… Dave and I were impressed with the openness, honesty and integrity displayed by Derek and his staff… Your deposits remain safe… We then chose four properties to verify the purchase prices, any liens against the properties, appraised values and ownership. Legal and file documentation were in good order. All properties had upside realizable potential…”
12. Roberts also went to CMHC in Texas in August 2009. Following that visit, Robertson on behalf of HEIR issued a communication to HEIR members dated September 1, 2009. Staff argued that rather than suggesting the existence of internal financial difficulties (as above the SEC alleges that CMHC collapsed in the summer of 2009), the communication cites “the present conditions of the U.S. real estate market” as one of the reasons for the delay in payments owed to CMHC investors. The communication goes on to recommend that HEIR members move their unsecured loans to limited partnerships created by CMHC and concludes with “Dave Roberts… and I believe that CMHC is taking the appropriate and viable means to return our capital in the best manner possible”.
13. I was also referred to the sworn affidavit of “G” dated July 8, 2011 (the G Affidavit) which stated that Robertson would refer to:
“due diligence performed by Mr. Roberts on certain issuers and highlight Mr. Roberts’ accounting expertise to bolster the impression that HEIR had performed adequate due diligence on issuers it promoted including [CMHC] and Canyon Acquisitions, LLC (Canyon). Archie would refer to Mr. Roberts’ efforts at seminars open to HEIR members, seminars open to the public, on radio broadcasts and in marketing literature. I recall Mr. Roberts personally addressing HEIR members in seminars in Ottawa, Hamilton and Toronto. I recall Mr. Roberts telling HEIR members about the due diligence he performed on CMHC, indicating that he had travelled to CMHC’s offices in Dallas, Texas and reviewed their books and records. I recall Mr. Roberts and Archie emphasizing the amount of time and effort Mr. Roberts spent on due diligence on CMHC, and I recall Mr. Roberts expressing his view that CMHC’s books and records were in order”Roberts as independent wealth coach with HEIR
14. Staff also argues that in his capacity as “independent wealth coach” with HEIR, Roberts engaged in many of the examples of HEIR trading and HEIR advising described above.
15. As an example, Staff points to the Affidavit of OSC Staff member Kelly Everest dated July 8, 2011 which relates to an investment by the S’s in Canyon. I was advised that the S’s invested approximately $30,000 through Roberts and his spouse, that the S’s combined income is $145,000, and that their total assets are approximately $49,000. As a result, Staff argues that there is no apparent basis to conclude that the S’s are accredited investors.
16. Roberts advised me that he has been an independent wealth building coach with HEIR since 2008. His spouse is also a wealth building coach. As wealth building coaches, they are each paid $5,000 per month. When Roberts starting providing further services to HEIR (reviewing new business opportunities, performing due diligence on investments, giving HEIR seminars, general business consulting, etc.) his compensation was increased to $10,000 per month.
17. Roberts described his role as wealth building coach with HEIR and claimed that he was not performing any registerable activity while performing those activities. He described his activities as very similar to financial planners by making HEIR presentations, collecting financial information, discussing a financial plan, and referring potential clients to dealers for completion of their trades. He told me that he did not advise or recommend purchases of securities, recommend specific products, hand out subscription materials, complete KYC forms, forecast future performance, or make guarantees. However, in responding to questions from Staff under oath, Roberts identified five other clients other than the S’s (G, B, C, M and F) for whom the only security recommended to them as part of their financial plan was securities of Canyon.The inconsistencies, errors and deficiencies in Desron’s registration application
18. Staff provided me with a number of examples of inconsistencies, errors and deficiencies in Desron’s registration application including:
- Roberts does not have the necessary proficiency to be the Chief Compliance Officer of Desron,
- The start date of Roberts’ employment with HEIR was disclosed as 2010 instead of 2008,
- Roberts was registered with another EMD (“R”), but the only compensation he received during his registration with R was from HEIR,
- Roberts is shown as a VP of HEIR, and
- Roberts showed his life insurance registration as still being in effect when it had lapsed in March 2010.
19. Roberts told me that, although he tried to correct some of the errors in his registration application, his proposed changes were not picked up by his counsel. He also advised that he didn’t review the final copy of his registration application.
20. Roberts also testified about the relationship between R and HEIR. He testified that there was no relationship between these two entities. However he also testified that despite being employed at R, all of his compensation came from HEIR and that he did no trading on behalf of R during his period of registration with them.Desron’s registration is objectionable
21. The Director has the clear power under the Act to determine that it would be objectionable to approve a registration application on broader public interest grounds, regardless of the determination as to suitability. Staff argues that the proposed registration of Desron would be objectionable on public interest grounds. A selection of the support provided by Staff in support of this position is outlined in the following paragraphs.
22. Staff referred me to the G affidavit which states that:
“Archie and I had numerous conversations… concerning his plans to create an exempt market dealer… in Ontario. These discussions… were fairly detailed and included discussions on structure and personnel and evolution. It was made clear to me that Mr. Roberts and Eric Deschamps would have key roles within [Desron] with Mr. Roberts leading the application process and heading the company… HEIR planned to change and offer only education and paid memberships while Desron was to handle all of the investments and investment transactions. Archie emphasized to me that he could not be perceived as having anything to do with a newly created exempt market dealer. He told me he considered himself to be “toxic” to an application for registration in light of the [OSC’s] ongoing investigations of him and of HEIR. He also told me that he planned to assume an active role in [Desron] when the “dust settled” around the investigation… he said he would always have a significant influence in the direction of [Desron] and that him and Mr. Roberts would “work something out”…”
23. I was also referred to the transcript of an interview with “M” with Staff on February 19, 2010 (the M transcript) which states at page 91:
“I think a lot of the stuff that [Robertson] has been doing with the pulling back [of] the submission for the LMD [Life Giving Securities Inc.] and taking his name off any of the submission information for [Desron] and having Eric or at least Dave Roberts, who was the president of both the prior LMD application and [Desron], and Archie’s admission that his toxic and he cannot be perceived as being involved in any of these, yet he is funding [Desron]”.
24. As an aside, Staff advised me that the registration application for Life Giving Securities Inc. had three registered and/or permitted individuals – Roberts, Robertson and Dave Robertson (unrelated to Archie Robertson). Roberts was intended to be a trading officer, director, shareholder and designated compliance officer with Life Giving Securities Inc.
25. With respect to Robertson’s involvement with Desron, Roberts suggested that Robertson didn’t “fund” Desron except for his purchase of 55% of the shares of the holding company for Desron and HEIR Inc. Roberts also advised that Robertson is not “involved with Desron” and that HEIR members can use any EMD that choose to in executing trades, including Desron.
26. Lastly, I was referred to several communications between HEIR and its members including:
- The April 9, 2010 email from HEIR to its members which states that “[T]hese last two years, [Roberts] has spent with HEIR where he was involved with assisting Archie Robertson in various projects. In the near future, [Roberts] will be the CEO for [Desron] overseeing investment opportunities for HEIR members”,
- The September 22, 2010 email from HEIR to its members which states that “HEIR is in the process of creating a new company that will serve as an Exempt Market Dealer. With the launch of [Desron]… HEIR will be positioned to offer greater financial education and referral services than ever before. As part of these changes, our HEIR consultants have been undergoing industry training and examinations to become properly licensed”, and
- The October 20, 2010 email from Robertson to HEIR members which states that “[O]ur new Exempt Market Dealer [Desron] has been applied for… This will allow our consultants to more actively counsel and advise you regarding your investments with the HEIR family”.
27. Depending on the degree to which an applicant for registration has failed to satisfy one or more of the criteria for registration, Staff will often recommend that registration be subject to terms and conditions tailored to the suitability concerns that are specific to the individual applicant. Less often, Staff will recommend that registration be denied altogether because of the extent or persistence of an applicant’s failure to satisfy the suitability criteria or because the proposed registration is otherwise objectionable. In Jaynes, Re (2000), 23 OSCB 1543, the OSC stated that “[w]hile terms and conditions restricting registration may be appropriate in a wide variety of circumstances, they should not be used to “shore up” a fundamentally objectionable registration”.
28. Staff argues that Desron’s registration would be fundamentally objectionable and that it cannot be shored up by terms and conditions.
29. My decision is to refuse the registration of Desron.
30. I concur with Staff’s submissions that Desron was and is affiliated with HEIR based on the examples set out in this decision. This was confirmed in my mind by the number of times that Roberts referred to HEIR as “we” or “our” during his submissions, including in response to a question from Staff regarding whether HEIR was expecting the Statement of Allegations. Roberts’ answer, in part, was “we were expecting that”.
31. I also concur with Staff that Roberts’ registration application contained a number of inconsistencies, errors and deficiencies, some of which are identified in this decision. While these inconsistencies, errors and deficiencies, in and of themselves may not have resulted in a decision to refuse Desron’s registration, I do not think that Roberts – or any other applicant for registration for that matter – should file a registration application that they have not thoroughly reviewed. It is not appropriate for an applicant for registration to blame counsel for mistakes in a registration application. Nor is it appropriate to not review the registration application before it is filed.
32. I also concur with Staff’s arguments with respect to the objectionable purpose of Desron’s registration application. In my view, Staff clearly established a significant relationship between Roberts (and thus Desron) and HEIR during the OTBH. Staff also referred me to a recent OTBH decision in the matter of Stephen Lorne Elias, Re (2011) 34 OSCB 7041. Staff argues, and I agree, that the conduct outlined in the Elias case is very similar to the conduct Staff alleges that Roberts did. I, in fact, would go further. In my view, Roberts’ conduct was far more egregious that Elias’ conduct in that, in addition to being a wealth building coach for HEIR, Roberts was also actively promoting his accounting designation and his knowledge in support of HEIR activities, events and investments (such as CMHC). As well, as set out elsewhere in this decision, I believe that there was and is a significant relationship between Roberts/Desron and HEIR and I believe that Desron was set up to be the EMD of choice for HEIR members to execute trades.
33. As to whether Roberts’ registration is otherwise objectionable or can be shored up by the use of terms and conditions, I refer to the Elias decision, which set out my views which are equally applicable here:
“Prior OSC decisions have held that registration is “otherwise objectionable” if it is determined… that it is not in the public interest for the person or company to be registered. As per the test set out in Mithras, in my view Elias’ unregistered trading in the past leads me to conclude that his conduct in the future (i.e. his possible registration) may be detrimental to the integrity of the capital markets. As a result, I concluded that it is not in the public interest to register Elias.
Lastly, as a result of my finding that Elias’ proposed registration is objectionable, I concur with Staff’s submissions that the use of proposed terms and conditions in this case would be shoring up a fundamentally objectionable registration.”
“Marrianne Bridge”, FCA
Compliance and Registrant Regulation Branch
Ontario Securities Commission
August 17, 2011