A hearing panel of the Mutual Fund Dealers Association of Canada’s (MFDA) central regional council has ordered a former one-man mutual fund dealer, Brampton, Ont.-based Wealth Advisory Services Ltd. (WAS), to pay a $4-million penalty and $50,000 in costs in connection with improper sales of a fraudulent product to its clients. It also sanctioned that the firm’s director and ultimate designated person, Robert James Thiessen, with a fine of $250,000 and costs of $10,000.

The firm’s membership in the MFDA was also terminated and Thiessen was permanently banned from the investment industry almost 10 years after fraud was uncovered. Neither WAS nor Thiessen participated in the hearing.

The sanctions follow a regulatory hearing, which found that WAS and Thiessen committed numerous violations of MFDA rules in connection with the sale of a risky investment product from a related firm that turned out to be fraudulent. In the initial hearing, the panel found that WAS and Thiessen sold approximately US$2.9-million worth of shares in S&P 500 Ltd. — a product that purported to invest in S&P 500 futures contracts — to 48 clients who ended up losing all of their money.

“The S&P 500 product was discovered to be a fraud,” in 2006, the panel notes in its decision, adding that the product’s manager, Gordon Lewis, “had fabricated the investment returns, was criminally charged with fraud and pleaded guilty.” As a result, Lewis was sentenced to 12 months of house arrest in 2009.

The hearing panel decision also describes Thiessen as the co-creator of the S&P 500 product, and the controlling mind of the product’s issuer as well as its sole director, president and secretary.

As for WAS, the decision notes that it was essentially “a one-man mutual fund dealer” operated by Douglas Lawson on a day-to-day basis. Lawson was the firm’s president, secretary, compliance officer and its only representative. However, he was also a “salaried employee of WAS who reported directly to and acted under the direction of Thiessen.”

Lawson settled with regulators in 2012; he admitted to misconduct and agreed to testify in the proceedings against Thiessen and the firm. Under the terms of the settlement, Lawson was fined $20,000; ordered to pay costs of $5,000; and permanently banned from supervisory roles and from selling exempt securities.

Now, the hearing panel that’s sanctioning the firm and Thiessen, says, “Had WAS and Thiessen ensured that a reasonable level of due diligence was conducted … they would have discovered extensive and fatal deficiencies with the investment product that made it unsuitable for any investor.”

As a result, the hearing panel ordered that WAS be fined $4 million, which it calculates as the Canadian dollar equivalent of the US$2.9 million clients lost due to the firm’s misconduct. This includes: failure to conduct adequate due diligence, suitability failures, inappropriate use of exemptions, undisclosed conflicts of interest and failure to ensure an adequate compliance program.

MFDA staff sought a fine in the range of $75,000-$100,000 against Thiessen. However, the hearing panel rejected that proposed penalty, saying it was too low. “It appears to play down the seriousness of Thiessen’s breaches of his obligations,” the hearing panel said, ruling that a fine of $250,000 “is more appropriate.”