An Ontario Securities Commission (OSC) hearing panel has approved a settlement with Clayton Smith, the head of defunct fund manager Crystal Wealth Management System Ltd., after finding he misappropriated $11.8 million from two Crystal Wealth mutual funds, the OSC announced on Thursday.
The settlement ordered that Smith be reprimanded and banned permanently from the markets. It also ordered Smith to pay a $250,000 administrative penalty and $50,000 in costs.
“Smith misappropriated significant amounts of money” from two of the firm’s 15 funds from 2012 to 2017, “by causing payments to be made, directly and indirectly, to himself, his wholly-owned corporations and two other corporations,” the hearing panel stated in its oral reasons for approval.
“Smith’s egregious, admittedly fraudulent conduct in directing and managing the investment funds of clients invested in the mortgage and media funds warrants serious sanctions,” the panel stated.
Ordinarily, disgorgement would be ordered in a case in which millions of dollars are misappropriated, the panel noted. However, no disgorgement was ordered because Crystal Wealth already is in receivership.
This imposes a claim on Smith’s assets that is “equivalent to a disgorgement order … with a more direct benefit to Crystal Wealth’s investors,” the panel stated.
As for concerns that the $250,000 penalty appears inadequate, the panel ruled that the fine is appropriate in this case given that settling the case avoids a lengthy, complex hearing that likely wouldn’t produce a better result for investors.
“In view of the receivership, it is far from clear that any disgorgement order and administrative penalty that might be imposed after a lengthy hearing would accomplish enough to make this settlement agreement unreasonable,” the panel stated. “As a result, the settlement agreement embodies adequate specific and general deterrence to bring the agreed sanctions within a reasonable range of appropriateness.”
The case highlights the lack of governance by mutual funds that distribute securities in the exempt market, the panel noted. It called on regulators to consider changing the rules as a result.
“Transactions involving conflicts of interest by mutual funds that are reporting issuers are subject to review by an independent review committee (IRC),” the panel stated.
“Had the transactions in this case been subject to IRC review, they might not have occurred. An IRC would at a minimum have made it more difficult for Smith to manage Crystal Wealth and the Crystal Wealth Funds in the manner he did.
“In view of the amounts of assets under management by mutual funds that are not reporting issuers,” the panel added, “the limitation of [IRC requirements] to reporting issuers should be reconsidered.”