Regulators in British Columbia have ruled that a former mutual fund salesman defrauded hundreds of investors out of millions of dollars through the improper sale of exempt market securities.
A hearing panel of the B.C. Securities Commission (BCSC) issued a decision Tuesday indicating that it found that between June 2007 and December 2010, David Michaels, violated securities laws when he advised 484 clients to purchase over $65 million of exempt market securities without being registered. It says that he generated $5.8 million in fees and commissions through those sales, but that at least $40 million of investors’ money has been lost, and that the rest remains “at risk”.
According to the decision, Michaels promoted his investment seminars through weekly radio infomercials that aired in Victoria, B.C. This led to clients who, the panel found, he advised to sell their traditional holdings, such as stocks, bonds and mutual funds, in order to purchase high-risk exempt market securities instead. He also advised the clients, many of them seniors, to use leverage to purchase their investments. In doing so, the panel ruled that he made misrepresentations to clients, deceived them, and betrayed their trust.
The decision notes that Michaels, who remained licensed in the insurance business, denied that he advised anyone. It says that he argued he was merely a salesman, and that he didn’t provide advice. He also denies that he made any misrepresentations to investors, or committed fraud, it says.
However, the panel ruled, it “was not a legitimate sales business, but a massive fraud. Through dishonesty and misrepresentation, he put his clients’ money at risk. As a result, they have lost millions of dollars.”
“Michaels was a skilled salesman, skills he used to devastating effect. He developed a business plan based on deception to sell his clients high-risk exempt market securities, earning millions in commissions and fees in the process. His business was no more than the execution of a $65 million fraud,” it says.
Ultimately, the panel ruled that Michaels violated the securities rules by acting as an advisor without being registered, making misrepresentations to investors, and perpetrating a fraud.
“This is a textbook example of improper sales practices that so violate the principle of investor protection and so seriously damage the integrity of our markets. Michaels preyed on clients by frightening them and misleading them into leaving the comparative safety of traditional capital markets for the far riskier part of the exempt market. In doing so, he damaged the confidence of investors in both traditional markets and the exempt market,” the panel said.
The panel has not yet handed down any penalties in the case. It directed commission staff and Michaels to make submissions on sanctions.