A regulatory hearing panel has fined and banned a former mutual fund rep after finding that he borrowed money from a client and failed to cooperate with an investigation. While the ban was easy to justify, the panel had a harder time setting the fine.
A Mutual Fund Dealers Association of Canada (MFDA) hearing panel ordered a permanent ban on Derek Chapman, a former rep with Quadrus Investment Services Inc. in St. Catherines, Ont. The panel also fined Chapman $300,000 and ordered him to pay $15,000 in costs after finding he violated MFDA rules by borrowing $600,000 from a client and failing to cooperate with an investigation.
“The combination of improper borrowing from a client and failure to cooperate show that the respondent should not be in the securities industry,” read the hearing panel decision.
But determining the appropriate fine against Chapman was a tougher task for the panel.
According to the decision, MFDA staff requested a $600,000 fine, noting that the fine imposed in previous cases of improper client borrowing was approximately equivalent to the amount borrowed. However, the panel noted that in cases where the borrowed money was repaid, the fine is often significantly lower.
In this case, the money that Chapman borrowed was repaid, but the circumstances of that repayment remained mysterious.
The panel noted that Chapman repaid the loan by mortgaging his family home. But questions arose about whether the lender he used to get the money to repay his MFDA client was a client of his insurance business.
“He would only say that [the second lender] was not an MFDA client,” the panel noted in its decision. “The respondent’s position was that he borrowed money from the first lender and paid it back and the involvement of other persons in how the money was obtained to pay [it] back is irrelevant.”
The MFDA discovered the source of the funds from an anonymous whistleblower tip and a real estate title search, but was “unable to determine the relationship between the mortgagee and the respondent,” the panel noted.
Ultimately, the panel concluded that it shouldn’t put much weight on the status of the second lender.
“[A]lthough the second lender may well have been one of the respondent’s insurance clients, we have no clear proof of his status and will leave that issue to other regulatory agencies,” the decision read.
The panel concluded that the fine for the client borrowing and failing to cooperate should be $300,000, a “substantial penalty” that meets the need for general deterrence when coupled with the permanent prohibition on Chapman.