A Mutual Fund Dealers Association of Canada (MFDA) has found that bankrupt mutual fund firm W.H. Stuart Mutuals Ltd. and one of its co-founders, Dianne Stuart, flagrantly violated industry rules.
Specifically, the MFDA hearing handed down its decision in a disciplinary hearing, upholding the allegations from the regulator’s enforcement staff against the firm and Stuart. The respondents did not participate in the proceeding. No penalties have been handed down in the case yet. A sanctions hearing is scheduled for Friday.
At the heart of the allegations was a “note program” that the firm operated, which allegedly took about $6 million from more than 180 clients and, rather than being invested for clients, was apparently diverted to other uses.
According to the MFDA hearing panel’s decision, most of the $6 million is unaccounted for; furthermore, it reports that the industry contingency fund, the MFDA Investor Protection Corp. (IPC) has received claims for more than $10 million from W.H. Stuart’s former clients stemming from losses allegedly attributable to the bankruptcy of the firm.
The firm was put into bankruptcy in 2013. The MFDA IPC reports that it has paid out more than $6 million in compensation related to the note program. “This likely underestimates the total losses associated with the program given certain limits applicable to IPC’s coverage,” the hearing panel’s decision says.
The hearing panel found that, as a result of the note scheme, Dianne Stuart and W. H. Stuart failed to deal fairly, honestly with clients; misappropriated money from clients; that they actively concealed this activity from others at the firm, external auditors, and the regulators; and that they also violated several financial compliance rules.
“The evidence revealed that Dianne Stuart and W.H. Stuart engaged in a massive scheme of dishonesty over a period of approximately 10 years or more,” states the hearing panel’s decision. “It was perpetuated in a variety of ways, including but not limited to the bogus note program. At its core was the falsification and concealment of records, and a pattern of deceit.
“The scheme represented a gross breach of trust and fiduciary responsibility, and resulted in losses in the millions of dollars,” the hearing panel adds. “The efforts taken to disguise this scheme of dishonesty from the MFDA and other regulators, auditors, investors, and others were truly staggering in their breadth, duration and level of sophistication.”
As a result, the panel concluded that the evidence presented in the case demonstrated, “not merely on a balance of probabilities but overwhelmingly, that Dianne Stuart and W.H. Stuart engaged in the misconduct” set out in the MFDA’s allegations against them.
The firm’s co-founder, Howard Stuart, was not targeted in the case’s central allegations. According to the decision, he now lives in California and has only had limited involvement with the day-to-day operations at the firm since 2006, even though he remained president and CEO of the firm and a director.
However, the panel found that he failed to co-operate with the MFDA’s investigation in this case. “The MFDA was prepared to be accommodating in how, when and where Mr. Stuart would be interviewed, having regard to information conveyed that he had suffered a heart attack and now lived in California. Indeed, the MFDA offered to conduct the interview by Skype, which would allow Mr. Stuart to remain in California,” the decision notes.
Photo copyright: serezniy/123RF