A mutual fund rep who tried to sue the regulators for $47.5 million in damages after he prevailed in an enforcement case brought against him by the Mutual Fund Dealers Association of Canada (MFDA), and sparred with regulators over registration issues, had all of his claims against the MFDA and the Ontario Securities Commission (OSC) dismissed in court.
The Ontario Superior Court of Justice rejected a lawsuit brought by the fund rep, Valery Herner, seeking damages for a series of alleged harms against him — including claims of malicious prosecution and negligent investigation against the MFDA. He also alleged that both the MFDA and the OSC should be held liable for misfeasance in public office, abuse of process, intentional interference with economic interests and civil conspiracy.
The court rejected all of the allegations against the regulators, finding that there was no real direct evidence supporting any of the allegations, apart from Herner’s own testimony, which often amounted to “bald assertions, with little to no evidence marshalled in support.”
“In my view, Herner’s conspiracy mindset, his propensity to blame others, his contempt for securities rules and his obligations, and his perspective on the role of regulatory agencies informed his view of all that transpired and many of the allegations made against the defendants,” the court said in its decision. “Ultimately, his belief is not borne out by the evidence.”
The claims against the regulators arose from Herner’s dealings with them in the wake of a client complaint that was filed against him in 2011. His dealer at the time, Investors Group Financial Services Inc., ended up paying compensation to the clients that complained and reported the complaint to the MFDA. It opened an investigation that ultimately led to the self-regulatory organization taking enforcement action against Herner in 2016, alleging that he knowingly recorded inaccurate KYC information for a couple of clients, which resulted in him recommending unsuitable investments to them.
The hearing panel that handled the case ended up siding with Herner, and dismissing the allegations against him in 2017.
That experience of facing enforcement allegations that were ultimately rejected underpinned the malicious prosecution allegations against the MFDA.
At the same time, Herner moved dealers in 2015, and again in 2016, which resulted in his registration being suspended while he switched firms. He faced months without being registered while the OSC considered his applications for re-registration — which were the basis of his claims against the OSC, along with the MFDA, alleging that they committed a variety of torts (such as abuse of process, intentional interference and conspiracy) which caused him to lose clients, assets and income during this time.
Ultimately, the court rejected all of his claims.
In terms of the enforcement proceeding, the court found that the MFDA had “reasonable and probable cause” to proceed with its allegations and that there was nothing malicious about its actions.
It also found that an SRO doesn’t owe a duty of care to the reps that it regulates, and that such a duty would “impede the MFDA’s ability to regulate its members and advisors and protect the public.”
“A duty of care to individual advisors could conflict with the MFDA’s duty to the public,” the court said. “It could also have a chilling effect on the MFDA’s investigative and enforcement functions and its mandate to protect the public.”
At the same time, the court found that the regulators didn’t engage in any unlawful or improper conduct that would support allegations of conspiracy, abuse of process or misfeasance in public office.
“Herner has failed to establish any of the claimed causes of action. He is therefore not entitled to damages,” the court said — adding that he also failed to prove that he suffered damages resulting from the regulators’ alleged misconduct.